PLG Reshoring Summit
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Transcript of PLG Reshoring Summit
11
Taylor Robinson
President, PLG Consultingwww.PLGConsulting.com
Shale Oil & Gas —A Key Driver for
Reshoring in the Tri-State Area
2
Topics
» About PLG Consulting
» Shale Oil & Gas 101
» Shale impact to the US
reindustrialization
» Wrap up
www.PLGConsulting.com
3
About PLG Consulting
» Boutique consulting firm with team members throughout the US Established in 2001
Over 80 clients and 200 engagements
Significant shale development practice since 2010
» Consulting services Strategy & optimization
Assessments & best practice benchmarking
Transportation assets & infrastructure development
Supply Chain design & operationalization
M&A/investments/private equity
» Specializing in these industry categories: Energy
Bulk commodities
Manufactured goods
Private Equity
www.PLGConsulting.com
4
Is The Shale Boom Different Than
Recent Energy Booms?
» Other recent energy “boom” events with major supply chain challenges….
» Common characteristics
New technology breakthroughs and/or dramatic market shifts
Speed to market is paramount -- supply chain strategies an afterthought
Rush of capital and new players
Continuous change and evolution required to improve efficiency
Previous two energy booms did not improve the cost of energy without
government incentiveswww.PLGConsulting.com
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Two Technology Breakthroughs Together:
Hydraulic Fracturing & Horizontal Drilling
Great YouTube video by
Marathon on fracing:
Http://www.youtube.com/watc
h?v=VY34PQUiwOQ
www.PLGConsulting.com
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US Shale Plays
Marcellus & Utica
- Large plays
- Great location
- Big potential
- Dry & wet
www.PLGConsulting.com
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Natural
Gas
• Proppants
• Clean water
• Chemicals
Materials
• Drilling Rigs
• OCTG (Pipe)
• Cement
Equipment
Shale Oil & Gas High Level
Supply Chain
Upstream
Exploration
Production
(Well Site)
Midstream Downstream
Refining
Fuel
Gasoline Distillates
Crude
Oil
Crude/
Gas
Mixture
Chemical
Feedstocks
Process
Product
Logistics Flow
Transportation
Processing
Gathering
Jet Fuel Residuals
www.PLGConsulting.com
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Shale Oil or Gas -- Which is more important
to US industry competitiveness?
0
200
400
600
800
1000
1200
1400
1600
Coal Natural Gas Nuclear Renewables Petroleum
Me
gaw
att
Ho
urs
(Th
ou
san
d)
Net Generation by Energy
37% (48% in 2007)
<1%
12%
19%
30% (21% in 2007)
Source: EIA
Source: EIA
» Natural Gas is 4X cheaper than oil on a
BTU-basis Not expected to change for the foreseeable future
Gas is more plentiful on most shale plays
» Gas drives an increasing share of the US
electricity generation capacity
» Gas by products are the “building blocks
of manufacturing”
» Gas’ cost advantages will drive new
innovation to convert gas to more fuels New long-haul trucks now available with natural gas
engines (CNG)
BNSF testing conversion to natural gas-fired trains (LNG)
Natural gas to liquid diesel conversion plants in planning
(Shell, Sasol)
Siluria Technologies converting natural gas into jet fuel
Increases gas demand
» Cleaner burning fuel 30% less carbon emissions than oil
53% less than coal
Net Generation by Energy Source (2012)
Energy Cost per Million BTU
www.PLGConsulting.com
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Chemical
Feedstocks
Downstream Supply Chain
Consumers
Petrochemicals
Aromatics AmmoniaMany
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
ProcessingRefinedCrude
Products
Process
Product
Logistics Flow
www.PLGConsulting.com
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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
www.PLGConsulting.com
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» Shale gas boom makes electricity costs lower
for US industries Reduced energy costs felt throughout supply chain
Large users are achieving greater even lower costs by buying
natural gas directly from wells with long term contracts
Some processes only become economically viable with lower costs
» Steel example -- Direct Reduction Iron (DRI) Shale gas strips oxygen from iron core to make high purity pellets
Produces higher quality steel vs. scrap steel
DRI pellets cost ~$270/ton vs. scrap steel cost ~$390/ton
At least five new DRI steel plants being considered in the U.S. by:
– Nucor/Encana, Bluescope Steel/Cargill, Essar Global Ltd.
Nucor signed a 20 year supply agreement with Encana Gas & Oil
» Reciprocal Growth and Other Industry Impacts Shale gas creates demand for OCTG steel pipe for wells
Increased demand for U.S. steel creates greater demand for U.S.
gas
Other energy-intensive industries will have great advantages and
are anticipating further expansions in the US
– Chemicals
– Glass
– Castings
31¢ 30¢
18¢
13¢9¢
7¢4¢ 3¢
0
5
10
15
20
25
30
35
¢/kW
h
A
Impact Of Shale Gas to US Industry --
Electricity Cost Competitiveness
Average Cost of Electricity (2012)
Three iron-ore storage domes stand near Nucor's direct-reduced iron plant in Convent, La.
www.wsj.com - Feb 1, 2013
www.PLGConsulting.com
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Gas Feedstock
Cost Competitiveness
» Gas feedstock (ethane) makes ethylene
very competitive Ethylene is feedstock for a broad range of chemical
products – a “building block” of manufacturing
>70 cents per pound more profit per pound from ethane
production compared to naphtha
Ethane-to-Naphtha cracker ratio
– Was 70%/30%
– Likely to reach 95%/5%
» Production capacity for ethylene set to
expand in U.S. -- abundant supply Investment in ethylene production has already increased by
33% domestically
Production capacity expected to rise by up to 35% in
coming years
Investments in the repair and expansion of existing
crackers also increasing
Ethane exports will grow fueling more demand for gas
Relative Profit Margins for Producing Ethylene from
Ethane and Naphtha
www.PLGConsulting.com
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The Graduate
www.PLGConsulting.com
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Pre-Shale Plastics Supply Chain
Component
Manufacturing
Lordstown
Assembly Plant
Imported crude
via vessel
(Naptha-based)
Resins
ship via
rail
Refineries
Resin
Plants
Cracker
www.PLGConsulting.com
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Potential Plastics Supply Chain
Gas Wells
CrackerResin
Plants
Lordstown
Assembly Plant
Component
Manufacturing
0
500
1000
1500
2000
2500
Asia USHistorical
Saudi US Recent
$/T
on
HDPE Calculated Cost
2018
1266
692
Sources: CMAI, TopLine Analytics, and Alembic analysis, 2012
» Local gas feedstock … local cracking …. local resin processing …. Local
manufacturing tremendous material, logistics and manufacturing cost advantage
» 5-10% total cost advantage potential vs. US Gulf Coast supply chain
» Plastics may replace other materials due to low cost – like aluminum, castings
HDPE Calculated CostPotential Scenario
www.PLGConsulting.com
526
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Manufacturing Cost of Goods
Sold (COGS) Comparison
» Direct & Indirect Materials make up 60-70% of typical manufactured component US has & will have substantive raw material cost advantages over much of the world
Winners will take advantage of constantly changing raw material markets with Value Engineering
Global sourcing capability still will remain a requirement
» Overseas shipping can account for 10% of the component cost – built in advantage for US
0
20
40
60
80
100
US 2008 China 2008
US vs. China COGS for Widget X - 2008
Direct Material Indirect Material Labor Overhead Shipping
0
20
40
60
80
100
US 2015 China 2015
US vs. China COGS for Widget X - 2015
Direct Material Indirect Material Labor Overhead Shipping
7080-20%
or more +10%?
US vs. China COGS for Widget X - 2008 US vs. China COGS for Widget X - 2015
www.PLGConsulting.com
100
80
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Key Questions for US manufacturers
1. Will we take advantage of the raw material & energy
cost advantages driven by shale gas?
2. Will we leverage the logistical cost and cash flow
advantages of local manufacturing?
3. Will we relentlessly lower our labor and overhead costs? PLG model assumes that US manufacturers can cut their labor and
overhead by 50% between 2008 & 2015
Must minimize all Supply Chain costs & cycle times from supplier to
customer
Lean and Six Sigma can’t be just buzzwords – must live it!
4. Will we lead our teams to do things differently than in the
past?
www.PLGConsulting.com
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Implications & Wrap Up
» Shale gas is a game-changer for US manufacturing
» US manufacturing must continuously reduce
their labor and overhead costs
» Competition will intensify, change, grow….
The Chinese will not easily give up on manufacturing US products
New entrants in US will use new materials and technology in many industries
“Innovate or perish”
» Shale Oil & Gas has additive benefits to the US economy
Energy independence – 2020 or 2025?
Driving large increase in exports – LNG, propane, petrochemicals, chemicals, plastics
Major improvement on trade deficit
Shale Oil & Gas supply chain will drive job growth
www.PLGConsulting.com
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Thank You!For follow up questions and information, please contact:
Taylor Robinson, President+1-508-982-1319 / [email protected]
This presentation will be available at:
www.PLGConsulting.com
“News” section
www.PLGConsulting.com