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Logistics Engineering Supply Chain
GE Capital
Oil & Natural Gas: The Evolving Freight Transportation Impacts Prepared for
October 15, 2013 New York, NY
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» Boutique consulting firm specializing in logistics, engineering, and supply chain § Established in 2001 § Over 100 clients and 250 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
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The Shale Development Revolution – Big Picture
Disruptive Technologies
• Hydraulic Fracturing • Horizontal Drilling
Continuous Evolution
• Productivity • Rapid Change
Market Dynamics • Supply & Demand • Customers • Price • Logistics
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4
Hydraulic Fracturing and Horizontal Drilling
» Transformational technologies working in concert § Hydraulic fracturing AND horizontal drilling
» US uniquely positioned for the techniques § Private mineral rights § Drilling intensity (wells per acre) § 90% of rig fleet equipped for horizontal drilling
» Rapid ROI for E&P companies § Typical well earns back capital cost in 1-2 years § Depending on play productivity, “break even” point of $40-85/
bbl § Liquid plays providing highest returns
Source: L. Maugeri, Harvard Kennedy School; RBN; PLG analysis; BENTEK
5
Rapid Improvements in Operational and Cost Efficiency
Source: BENTEK, September 2013 Source: Southwestern Energy investor presentation, June 2013
Representative Productivity Gains – Fayetteville Shale Play
» Evolution of drilling technology § Fracking first used in 1947 § Revolutionary advances since 2009 § Time required for drilling 15,000+ ft. well cut in half in last two years (nine days vs. 18) § Dramatic increase in efficiency per rig, making rig count alone no longer a significant indicator of production § Hydraulic fracturing/horizontal drilling yields 3-10x the initial production rate of conventional wells
6
Shale Driving Growth in Natural Gas and Crude Oil Production
Source: Baker Hughes 2013
» 1,756 rigs in operation in USA as of Oct. 4, 2013
» Dramatic production growth § 700% increase in gas production since 2007; forecast to grow 9 Bcf/d
from 2012-2018
§ Domestic oil production at 22 year high; forecast to reach 10MM bbl/d by 2018
» U.S. is on track to pass Russia as the world’s largest producer of oil and gas combined this year (Wall Street Journal, Oct. 2, 2013)
GAS OIL THERMAL
Source: Baker Hughes
Source: EIA
U.S. Crude Oil Production
July 2013 7.49 MM bpd
Source: Bentek
7
US Shale Plays
Gas: Marcellus Haynesville Barnett Oil: Bakken Eagle Ford Permian Basin
Most Active Plays
Utica (NGLs) Niobrara Mississippi Lime
Emerging Plays
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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
9
» Over $95B in new announced “energy intensive” industrial plant expansions will come on-line over the next five years § ~50% foreign direct investment
» Shale development impact on the
railcar industry is long-term, wide-ranging, and positive with only one exception
Railcar Industry Impacts
10
Hydraulic Fracturing Materials Inputs and Logistics – Per Well
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
11
Correlation of Operating Rig Count with Sand and Crude Shipments
STCC 14413 (sand) and 13111 (petroleum) Source: US Rail Desktop, Baker Hughes
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
Ope
ratin
g O
nsho
re R
igs
Car
load
s
Operating On Shore Rigs All Sand Carloads Petroleum Carloads
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All Sand Handled by Railroad
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Car
load
s
Quarterly Data
UP
BNSF
NS
CN
CSXT
CPRS
KCS
STCC 14413 Source: US Rail Desktop
13
Upper Midwest Sand Shipping Flows
Major Frac Sand Mining Areas
Frac Sand Transloading Clusters
Major Frac Sand Rail Traffic Lanes 13
14
U.S. Frac Sand Industry Trends
» Industry consolidation continues, with focus on integrated supply chains § Hi-Crush purchase of D&I Silica (May) § US Silica multi-year agreement with Wildcat Minerals (August) § FTS International sand and logistics (non-truck) divestiture to Fairmont Minerals (July) § PE firms continue to be interested in this space
» Class I railroad/sand supplier alliances are likely to continue § US Silica – BNSF facility in San Antonio § Others in progress
» Significant barriers to entry § 2 - 3 years to secure property, permit, and begin construction § Increasing concerns regarding environmental, health, agricultural and infrastructure impact at the
state and county levels - OSHA August 23, 2013 announcement regarding proposed crystalline silica exposure rules
- Counties commissioning studies regarding property value and agricultural impacts
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Processed Sand Total Delivered Cost per Ton
Source: PLG analysis using BNSF public pricing – does not include fixed assets at origin or destination
» “Benchmark” unit train example – Illinois to South Texas § Single-line haul (one rail carrier)
§ Private railcars
§ Railcar fleet achieving two round trips per month
§ Origin sand facility has direct rail load-out
§ Destination trucking is less than 100 miles
» Unit train operations include efficient origin/destination handling § 24 – 36 hours per train
» Manifest service would increase rail-related costs by 17% § Increased freight rate (14% higher)
§ Railcar fleet only achieves one turn per month, on average
§ Additional trackage required to accommodate larger fleet
§ Delivery patterns are more variable, requiring additional destination storage and inventory
Total Delivered Cost per Ton ~ $122
Sand, 33%
Destination Transload
& Trucking, 25%
Rail - Freight, FSC and
Eqp Lease, 42%
Logistics costs drive ~ 67% of total delivered
sand cost
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Supply Chain Critical to Success in Sand Industry
Mining Processing Rail Load-out
Long Haul Rail
Transloading and Storage
Trucking to Well
» End customers will continue to mix in-sourcing and outsourcing § Early in-sourcing driven by supply assurance and controlling own destiny
§ Can outsource beat the most efficient in-sourcing?
§ Will the end customers consider sand to be core competency?
» End customers desire “Storefronts” – Choosing between Walmart and Target would be best § Allows them to focus on their core competencies
§ Minimizes their inventory costs while maximizing their flexibility
» Sand supply winners understand the total cost structure, leverage each link of the supply chain and understand cost trade-offs
Best “Tier 1”
suppliers will win
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Sand Railcar Market Conditions
» Conditions are normalizing § Builder backlog has been resolved
– Wait time is now attributable to other car types in the pipeline
§ Many surplus cars have found homes § 2013 total production of sand cars will be closer to the
historical average of 2,000 – 3,000 units
» Lease market settling into familiar patterns § Traditional pricing behavior: Newer/286k cars more
expensive than older/263k cars § Cars with sub-optimal design (i.e. older grain cars) being
flushed out and replaced where possible § Lessors placing modest “spec” orders § Credit-worthiness of lessee is still a critical criteria § Market is still trying to find its feet
» Looking forward § Positive developments in housing/construction should
equate to additional demand for small cube hoppers
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Looking Ahead: What Will the Frac Sand Industry Look Like in 3 to 5 Years?
» Frac sand industry will likely have significant growth in the coming years
§ Growth rate driven by liquids now – crude, NGL, condensate § New sources of gas demand will drive gas drilling growth eventually § Natural sand is the preferred proppant; larger well trend continues
» “Survival of the fittest” supply chain – the evolution will continue
§ “Tier 1” supply base will further consolidate smaller players § The best niche players will thrive as 2nd tier and in small plays § Supply chain practices and technology flow in from other industries § Continuous Improvement mindset required to win
» Heavy focus on cost reduction will continue § Cost and margin will continue to be rationalized – direct and soft § Difficult to win without volume leverage
– Sand supply – Unit trains – High volume transload and storage capability
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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 ~42-65% – Propane ~28% – Normal Butane ~8% – Iso-Butane ~9% – Condensate ~13%
» Crude Oil § Bakken play as a model § Surging Permian and Eagle Ford development
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Shale Development Natural Gas Impacts
» Industry a “victim of its own success” § Fracking results in oversupply; gas prices down
33% since 2010 § Breakeven gas price at 10% IRR: ~$3.25 mm/btu § Rigs leave Marcellus, other gas plays for oil plays
(~700 “non producing” wells in PA) § Helped to deflate frac sand boom
» Lower gas prices have resulted in 10-13% market share capture from coal for thermal generation
» Low gas prices fueling industrial
renaissance § Overall manufacturing (cost of electricity; “re-
shoring”) § Specific sectors that use natural gas as a
feedstock – Methanol (16MM m/t new capacity under consideration) – Steel – Fertilizer
20 Source: RBN, PLG analysis
Source: RBN
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Natural Gas Displacement of Coal for Thermal Generation
» Natural gas now supplying approx. 30% of thermal fuel demand (~13% share capture from coal)
» Despite recent increases in prices, natural gas share
capture expected to maintain or grow § Environmental regulations of coal burning § Scheduled coal unit retirements; 55GW through 2020
» Adversely affecting coal industry, railroad coal loadings § US coal consumption declined 21% from 2007-2012
21 Source: RBN Energy, June 2013
Fuel Cost Comparison for Electricity Generation
Source: Bentek, PLG analysis
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Shale Related Rail Traffic Still Small Relative to Coal Volumes
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2008
2009
2010
2011
2012
2013
Sand
Crude Coal
Car
load
s
Quarterly Data
Sand
Crude
Coal
STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop
Railcars Handled: Sand, Crude, & Coal
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Coal, Crude & Sand Trends: Carloads and Revenue
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
-
1
2
3
4
5
6
7
8
9
10
Bill
ions
Mill
ions
Carloads Revenue
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
-
200
400
600
800
1,000
1,200
1,400
Bill
ions
Thou
sand
s
Sand Crude Revenue
STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop
Total Coal Carloads and Revenue Combined Sand and Crude Carloads and Revenue
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Shale Gas Driving Steel Manufacturing Comeback in US
» Shale gas boom makes direct-reduced iron steel economical § Not new technology, but preferable with lower cost natural gas § DRI process uses natural gas in place of coal to produce iron § At current gas prices, DRI can generate iron pellets at a cost of $260 to
$280/ton vs. scrap steel currently trading at ~$390/ton § DRI-derived steel of higher quality than that created from recycled
scrap, further driving demand
» U.S. jobs and international investment § Steel production in the U.S has shrunk 14% since Jan. 2008 – Compare to 15% growth in steel production internationally
» Reciprocal growth § Increased demand for U.S. steel creates greater demand for U.S. gas § Tubular steel products has 8% yearly growth in demand, driven by
increase in shale oil and gas § Joint venture between Nucor Corp. and Encana Corp. commits $3
billion to development of new gas wells to support DRI plants – Nucor’s plant with 2.5 million tons of DRI capacity is expected to open end of
2013
§ Voestalpine $740MM investment in Texas for direct reduction plant with 2 million metric ton capacity, due to begin operations in late 2015
§ Potential US Steel-Republic Steel JV to produce DRI
Source: World Steel Association
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Shale Gas Encourages Upgrade of Natural Gas to Methanol
» Upgrade low-cost natural gas to methanol § Primary uses are production of
formaldehyde, acetic acid, and other chemicals
§ Methanol is a very cost-efficient way to move natural gas to higher-value foreign markets
» U.S. is a growing methanol market § Represents 10% of the global market § U.S. imports 89% of its supply on average
» Opportunity in U.S. methanol production § Capture price spread between low-cost
natural gas and methanol § Bolt-on approach is possible on some
existing hydrogen infrastructure
Source: Valero investor presentation, September 2013
Source: Valero investor presentation, September 2013
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Shale Gas Development Impact on Fertilizer Market
» Natural gas is a feedstock for ammonia production § Represents ~70% of cash costs (CF Industries)
» Lower gas prices directly benefit American farmers § Increased demand for corn, soybeans has driven fertilizer costs higher § Excess natural gas supply can be utilized to produce greater volumes
of nitrogen-based fertilizer more economically § North American reliance on nitrogen imports means that American
producers typically run at 100% of available capacity (CF Industries)
» Cheap U.S. natural gas means billions in investment for new domestic fertilizer plants, displacing ~11 MM m/t of imports § Orascom/Iowa Fertilizer Company - Wever, IA § CHS - Spiritwood, ND § Ohio Valley Resources - Spencer County, IN § Yara - Belle Plaine, SK Canada § Northern Plains Nitrogen – Grand Forks, ND § CF Industries – expansions at Donaldsonville, LA and Port Neal, IA § PotashCorp - resumption of ammonia production at Geismar, LA § EuroChem – Iberville Parish / St. John the Baptist Parish, LA § Agrium – Borger, TX
» Rush of new plant announcements sparked oversupply concerns, cancelations (Yara, Agrium-KY)
27
Looking Ahead: Natural Gas
» Oversupply conditions expected to persist through 2020
» Factors that could revive
demand, production, and prices (>$5/MMbtu) § Industrial use expansions come online
over next 5 years § Continued toughening of EPA
regulations of coal § Historic import/export reversal of US/
Canada natural gas flows by 2014 (Marcellus gas exports to Canada), plus exports to Mexico
§ Technology advancements for increased use of CNG as a transportation fuel
§ LNG exports Source: BENTEK, September 2013
28
LNG Export Opportunity » Political/policy battle between domestic industrial users and
producers
» Sabine Pass, LA, Freeport, TX, Cove Point, MD now permitted for exports § 5.6 Bcf/day export capacity to come online by 2015; coincides with widening
of Panama Canal § Represents ~8% of projected US dry gas production
» 20 additional terminal applications totaling 29 Bcf/day of export capacity pending before FERC
Source: Congressional Research Service, EIA
Selected US Natural Gas Import & Export Infrastructure
Source: Waterborne Energy Inc. Data in $US/MMBtu
29
Shale Development NGL Impacts
» Requires fractionation facilities proximal to production § “Y-grade” must be separated into purified products § 75% of fractionation capacity in US Gulf Coast § Mt. Belvieu, TX major trading & storage hub § 500 Mb/d of new fractionation capacity planned for Utica § Utica NGL production growth expected to exceed 600% between
2013-2015
» Similar to dry gas, strong production due to fracking has resulted in oversupply and depressed prices § Chemical industry benefits
30 Source: American Chemistry Council, May 2013
Shale Development Driving US Chemical Industry Expansion
» Abundant ethane supplies have sparked chemical industry renaissance § 100% of captured ethane is “cracked” to make ethylene, the most basic building block in the chemicals
supply chain § Planned expansions will increase US ethylene capacity 33% (11 MMmt) by 2017 § Full economic impact of expansions won’t be felt until 2016
Source: EIA
31
Low Cost Feedstocks Driving US Competitiveness vs. ROW
» 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) § Europe, Asia reliant on oil-linked naptha as petrochemical feedstock
» Domestic end-use of materials, i.e. plastics, will expand significantly
» Up to 40% of new petrochemical output will be for export
Source: LyondellBasell investor presentation, September 2013
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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
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Looking Ahead: NGLs
Source: Canadian Energy Research Institute
Source: Sunoco Logistics
» US NGL production forecast to increase by 1.6MM b/d from 2012-2018
» The (somewhat) hidden Condensate story
§ Used as diluent for heavy Canadian tar sands oil – critical for transportation as “Dilbit”
§ Significant investment in infrastructure being made to deliver Eagle Ford, Utica condensate to Western Canada
§ Primary delivery via pipeline, but major rail volumes ex. Utica are required to get to Midwest pipeline injection points
§ Canadian diluent import demand expected to grow from 200 Mb/d to 500 Mb/d by 2018
» Expect export market for NGLs to expand § Pipeline reversals undertaken to meet demand,
particularly ex. Utica to Sarnia, ON petrochemical complex and export storage and dock facilities in Philadelphia
§ US projected to export over 1MM bb/d of NGLs by 2018
Source: RBN, PLG analysis
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Shale Development Crude Oil Impacts
» Dramatic increases in US production due to hydraulic fracturing and horizontal drilling § 7.49 MM bbl/day § Projected to grow by ~30% over next four years § Strong play in Bakken; surging Permian and
Eagle Ford development § “Tight” oil sources driving overall North American
growth § Production forecasts frequently revised upward § Largest area of non-OPEC growth is North
America Source: BENTEK, September 2013
35
Revitalization of US Refining Industry
» Shale development creating competitive advantage for US refined products globally § Strong growth for US exports to Latin America, Asia § US now a net exporter of petroleum products § Record 3.8MM bbl/day of exports in July 2013 § High demand for US low-sulfur diesel in South
America and Europe
Source: Valero investor presentation, September 2013; Wall Street Journal 10/8/13
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Driving Toward “Oil Independence?”
» Decreasing dependency on foreign crude § Combination of US shale plus Canadian oil sands
estimated to reduce imports to <15% by 2020
» Supply isn’t enough – “independence” also relies on lower domestic fuels consumption § CAFE standards the primary driver
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Displacement of Waterborne Crudes by Mid-Continent Sources
» Reducing imports means reducing waterborne crudes § West African imports already down ~70% from 2010 levels
» Mid-continent sources displacing imports at coasts, making rail critical to the total crude market § Bakken as case study for large crude by rail operations
Source: Valero Investor Presentation, September 2013
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Some Basic Facts About Crude Oil: Grades and Qualities
» Not all crudes are created equal – light/sweet vs. heavy/sour § Heavy/sour crudes include Western
Canada, Venezuela, Mexico, Alaska North Slope (ANS), Middle East (light/sour)
§ Heavy/sour has higher sulfur content, yield for asphalt, diesel
» Refineries are generally configured to run certain types of crude § Significant investments made ($48B
since 2005) at select refineries to install coker units that will allow processing of heavy/sour
§ Major heavy/sour refining clusters: Texas Gulf Coast, Chicago, southern Illinois, California
Source: RBN Energy
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Some Basic Facts About Crude Oil: Major Production and Refining Areas
» The special case of the Canada Oil Sands § Heavy/sour crude has a natural home in Midwest and US Gulf
Coast (~2.8 MM bpd demand at USGC) § Pipeline capacity to US Midwest refining centers is at capacity § Pipeline expansions to coasts, US markets still 2+ years away
» Brent, WTI, and US shale play crudes (Bakken, Permian, Niobrara, Eagle Ford) are light/sweet § US is close to saturation point on light/sweet crude at mid-
continent and USGC refining areas
Source: CAPP, June 2013
Source: Turner Mason, RBN Energy
US Crude Oil Production Growth by Grade
Source: RBN Energy
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US Crude Market Overview
Bakken
Oil Sands
Permian
Eagle Ford
Hardisty, AB
Clearbrook, MN
Cushing, OK
St. James, LA
Sources: EIA, PLG Analysis (Google Earth)
Brent
Mexican Maya
Venezuela Crude
West African
ANS
Brent
West African Middle East
East Coast Refiners
Pacific Northwest Refiners
California Refiners
TX Gulf Coast Refiners
LA Gulf Coast Refiners
Midwest Refiners
PADD I Demand
PADD III Demand
7,650 kbpd
PADD V Demand
2,400 kbpd
1,050 kbpd
Light/Sweet
Heavy/Sour
Light/Sweet
Heavy/Sour
Light/Sweet
Heavy/Sour
3,250 kbpd
Heavy/Sour
Light/Sweet
PADD II Demand
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Crude By Rail From the Bakken – Recent History
» 2009-2010: Objective of crude by rail to “bridge the gap” until pipelines built § 2010-2011 discount of ~$8-12/bbl for Bakken
crude vs. peer WTI § Undervalued due to logistics constraints
“stranding” the oil § EOG a market leader in developing unit train
capability from the Bakken
» 2011-2012: Significant development of crude by rail loading terminals
» 2012: Crude by rail viewed as a core mode of transportation and means of arbitrage § Differentials made rail attractive: Bakken and WTI trading at ~$12-$15/bbl less than Brent; Alberta
Bitumen trading at ~$30/bbl less than Brent § Market response: E&P, midstream players willing to rapidly deploy significant capital to enable access
and capitalize on spreads – Multi-modal logistics hubs in shale plays and at destination markets (i.e. Cushing, OK, St. James, LA, Pt. Arthur, TX,
Albany, NY, Bakersfield, CA) – Lease and purchase of railcar fleets
§ Refineries installing unit train receiving capability - particularly coastal refineries previously captive to waterborne imports (i.e. Philadelphia, PA, St. John, NB, Anacortes, WA, Ferndale, WA)
42
2013: Rail Captures 70% Market Share of Bakken Production
» Takeaway capacity now exceeds production
» Pipelines operating below capacity; some project cancelations
» Strong rail volumes to start the year have leveled off as of May
Source: EIA, North Dakota Pipeline Authority, PLG
~874,000 BPD July 2013
First outbound unit train shipment December, 2009
Source: North Dakota Pipeline Authority, PLG Analysis
43
Crude Oil by Rail – North Dakota Terminals
North Dakota Crude Oil Rail Loading Capacity (Barrels Per Day) Rail Terminals 2013 2014* 2015* Rail Carrier EOG Rail, Stanley, ND (Up to 90,000 BOPD) 65,000 65,000 65,000 BNSF
Inergy COLT Hub, Epping, ND (Q2 2012) 120,000 120,000 120,000 BNSF
Hess Rail, Tioga, ND (Up to 120,000 BOPD) 60,000 60,000 60,000 BNSF
Bakken Oil Express, Dickinson, ND 100,000 100,000 100,000 BNSF
Savage Services, Trenton, ND (Q2 2012 Unit Trains) 90,000 90,000 90,000 BNSF
Enbridge, Berthold, ND (Q4 2012) 80,000 80,000 80,000 BNSF
Great Northern Midstream, Fryburg, ND (Q1 2013) 60,000 60,000 60,000 BNSF
Musket, Dore, ND (Q2 2012) 60,000 60,000 60,000 BNSF
Plains, Ross, ND 65,000 65,000 65,000 BNSF
Global/Basin Transload, Zap, ND (Estimate Not Confirmed) 40,000 40,000 40,000 BNSF
BNSF Total Capacity 740,000 740,000 740,000
Plains - Van Hook, New Town, ND 65,000 65,000 65,000 CP
Dakota Plains, New Town, ND 30,000 80,000 80,000 CP
Global Partners, Stampede, ND 60,000 60,000 60,000 CP
CP Total 155,000 205,000 205,000
Various Sites in Minot, Dore, Donnybrook, and Gascoyne 30,000 30,000 30,000
Total Crude Oil Rail Loading Capacity 925,000 975,000 975,000
*Project still in the review or proposed phase Year End System Capacity
Source: North Dakota Pipeline Authority (September 2013), PLG Analysis
44
North Dakota Class I Railroads and Crude Oil Terminals
Map by PLG Consulting 44
45
Bakken Area Outbound Pipelines
45
North Dakota Crude Oil Pipeline Capacity (Barrels Per Day) Pipelines 2013 2014* 2015* Butte Pipeline 160,000 160,000 160,000 Butte Loop (Late 2014) - 110,000 110,000 Enbridge Mainline North Dakota 210,000 210,000 210,000 Enbridge Bakken Expansion Program (Q1-11/Q1-13) 145,000 145,000 145,000 Plains Bakken North (Up to 75,000 BOPD) 50,000 50,000 50,000 High Prairie Pipeline* - 150,000 150,000 Enbridge Sandpiper* (Q1 2016) - - - TransCanada Keystone XL* (2015) - - 100,000
Hiland Partners Double H Pipeline (Q3 2014, Up to 100,000 BOPD) 50,000 50,000 Pipeline Total 565,000 875,000 975,000 *Project Still in the Review or Proposed Phase Year End System Capacity
Source: North Dakota Pipeline Authority, September 2013
46
Bakken Production vs. Total Takeaway Capacity: 2013–2015 Projection
Year
ND Production Forecast (Bpd)
Pipeline Capacity
Rail Terminal Capacity
Rail Carrier Capacity
ND Refinery Consumption
Total Outbound &
Refinery Capacity
Excess Logistics Capacity
2013 850,000 565,000 925,000 1,300,000 68,000 1,558,000 708,000
2014 980,000 875,000 975,000 1,300,000 68,000 1,918,000 938,000
2015 1,150,000 975,000 975,000 1,350,000 108,000 2,058,000 908,000 Source: North Dakota Pipeline Authority (September 2013) , PLG Analysis Bpd = Barrels per Day
47
Crude Oil by Rail vs. Pipeline
$6.50
$12.00 $10.50
$15.00
$-
$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
» Rail cost: 50-100% more expensive than pipeline transport
» Near-term offsetting rail advantages: § Site permitting, construction much faster § Lower capital cost § Scalable § Shorter contracts (2-3 year commitments vs. 10
years for pipeline) § Faster transit times § Access to coastal areas not connected via pipeline § Origin/destination flexibility § Primary advantage: Tool of arbitrage for trading
desks
» Rail pricing drivers § Advantaged rate structures for first-movers,
volume, and unit train operators § “Floor” has been set for crude by rail pricing § Crude price differentials more important than cost
vs. pipeline § Destination flexibility
Cost Comparison: Bakken to Cushing and USGC
48
All Crude Handled by Railroad Volume Growth
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Car
load
s
Quarterly Data
BNSF
UP
CPRS
NS
CSXT
CN
KCS
STCC 13111 Source: US Rail Desktop
49
Source: CAPP Report, 2013
Crude Oil Pipelines: Existing and Planned
» Current pipelines ex. Bakken operating below capacity § However, volumes have
increased over past 60 days
» Pipeline industry has been challenged by new dynamic NA oil market § Fixed routes, long lead times § 10 year commitments required
for new build pipeline projects § Lack of subscription interest in
KM Freedom project (Permian-California)
» Several natural gas pipeline conversions planned § Trunkline (ETP) – Patoka, IL-
St. James, LA § Energy East (TransCanada) –
Hardisty, AB-St. Johns, NS
50 50
Crude Tank Car Market Conditions
» Potential bottleneck: Railcars § Current order backlog runs to early 2015 (~48,000 cars) § Major purchases by oil majors and midstream companies § Extremely tight market with very high lease rates § Current crude fleet of ~30,000 cars equivalent to ~1-1.5 MM bbl/
day § Short term demand is highly dependent on WTI – Brent spread
» Railcar type is important § General service 31,800 gallon capacity, non-coiled, non-
insulated cars are optimized for light crudes exclusively § Coiled and insulated cars with 25,500 – 28,800 gallon
capacities offer multiple product flexibility for light or heavy crude and many other chemical and oil products – Coiled and insulated cars have many redeployment options if not
in crude oil service
» Key question: If/is/when will the crude tank car industry become overbuilt?
Source: GATX, PLG analysis
51
Forecast of Crude Railcar Supply and Demand
» Production increases vs. railcar capacity increases § Current crude fleet ~30k cars and
backlog of ~48.2k runs through mid 2015
§ If pipelines and local refining can consume production increases in Permian and Eagle Ford, crude by rail will be primarily Bakken and Canadian Oil Sands-driven
» Under best-case scenario for rail market share capture, data suggests existing & planned tank car fleet exceeds demand
» Possible retrofit of “old design” railcars would decrease capacity § Approx. 2/3 of unlined, 30K/gallon
fleet would need retrofit
Sources: CAPP, AAR, NDPA, GATX, and PLG analysis
Assumptions: • 80% of projected Williston Basin production • 80% utilization of Oil Sands announced 300 kbpd of rail terminals through 2014, and 80% utilization of an additional 300
kbpd for 2015 • 30,000 crude railcars in March and build rate of 21,500 railcars/year through 2015 with attrition rate of 7,800 railcars/year • 700 bbl. average railcar capacity and average 23 day turn • Other production sources increase at rate of 2% per quarter
0
500
1,000
1,500
2,000
2,500
Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15
Thou
sand
bbl
s/da
y
Best-Case Crude by Rail Potential vs. Crude Railcar Capacity
Other Production Sources Williston
Oil Sands Crude Railcar Capacity
Railcar backlog is through mid 2015; retirement of old railcars will reduce capacity if no additional railcars built
Q1 2013 originated rail carloads of crude petroleum were 97,135, which equates to 755,000 barrels per day (assume 700/bbl. average capacity)
52
Lac Megantic Investigation Results – Update
» Montreal, Maine and Atlantic Railway (MMA) filed for Chapter 11 bankruptcy on August 7 and had its Canadian rail operating license suspended on August 13
» Transport Canada will review adequacy of rail carrier insurance requirements in light of the estimated $200+ million estimated damages
» MMA insurance level was $25 million vs. industry average of $32 million
» September: Transportation Safety Board of Canada finds World Fuels Newtown, ND misclassified the crude oil; Irving Oil and World Fuels have been cited with potential criminal impacts § Ten oil producers delivered oil into Newtown, ND terminal with
MSDS’s showing varying determinations on flash and boiling point tests
§ Newtown described the product in the cars as the lowest level hazard class & volatility/flammability level, when in fact it contained some much more volatile crude oils
§ TSB has concluded that the crude oil shipped was as flammable as gasoline
53
Rail Operations – Impacts on Canadian Railroads
» July 24: Transport Canada announces the following measures for Canadian railroads § Two man crews are required on all trains
transporting hazardous materials (hazmat) cars § No locomotive attached to hazmat cars will be
left unattended on a main track § All unattended locomotives on main tracks are
protected from unauthorized entry § Directional controls must be removed from any
unattended locomotives on main and siding tracks
§ Hand brakes must be applied to all locomotives attached to cars that are left unattended for more than one hour on a main or siding
§ Automatic and independent brakes must be applied to all locomotives attached to cars and left unattended for one hour or less
54
Rail Operations Impacts – US Rail Carriers
» August 2: FRA – emergency order issued to US railroads § No unattended hazmat trains outside yards § Railroads must develop process for securing unattended hazmat trains § Number of handbrakes applied to unattended train must be communicated § Railroads must inspect train after an emergency response occurs § Short lines are subject to compliance with the emergency order
55
FRA Crude Oil Product Quality and Classification Initiative
» FRA is investigating and put shippers on “notice to evaluate their processes” § Improved and frequent crude oil chemistry testing to
determine volatility and appropriate MSDS and classification
§ Shippers must use only the proper tank car/vessel that meets hazmat regulation requirements
§ Establishes minimum tank car outages and recommends product specific gravity testing prior to car loading
§ Concern is with product expansion and leaks en route § Expressed concern about corrosion resulting from oil
chemistry unknowns and recommends testing for corrosion agents
» PHMSA (Pipeline and Hazardous Materials Safety Administration) initiates “Bakken Blitz” to test product samples vs. BOL description for accuracy
56
Potential Future Rail Industry Impacts
» Bakken Crude oil volatility testing (FRA Directive) § Oil chemistry varies by well/pad § Concerns with extremely low flash and boiling points § Highly volatile crudes may require post 2011 type tank cars
» Short line operations/rules changes – safety vs. economics § Vetting process for small operators – shipper responsibility § Higher insurance level requirements likely
» DOT 111A Car type § New cars – Crude oil 111A car design, will it be safe enough?
§ Likely yes
§ Existing 111A fleet of 240,000 cars – to be determined – Retrofits for certain high hazmats? – Fleet grandfather provisions? – Tank car shop capacity concerns
§ Crude oil corrosion concerns – under investigation – Potential car lining if tank corrosion is evident
57
Lac Megantic Incident is Changing the Crude by Rail Business
» Increased product testing, documentation and traceability
» Increased FRA audit and scrutiny of entire CBR supply chain
» Railroad operating rule changes on hazmat train handling
» Increased financial responsibility minimums for short line carriers
» Pre-2011 flammable liquid tank car fleet will be impacted (ethanol and crude oils) § Estimate two-thirds of fleet
58 58
Shale Development and Crude By Rail: Current Market Dynamics
» The gusher of new US light/sweet shale oil production made possible by fracking has upended the traditional oil logistics and trading patterns § Result: “Wrong place/wrong oil” supply displacements, i.e.
Cushing overflow § Rapid investment in new logistics infrastructure, routes,
modes, and terminals (“re-plumbing”)
» Bakken now sufficiently developed; next immediate areas for significant investment are Utica, Oil Sands, Permian, coastal areas and and facilities that support bitumen transport in particular § Est. 500M bbl/day rail loadout capacity being developed in
Oil Sands § Rail build-out/additional takeaway capacity has helped
Alberta heavy/sour reach highest price in 5 years ($91/bbl)
» Today: § Spreads have narrowed, limiting arbitrage opportunities
and slowing crude by rail growth § Price differentials driving trading and logistics patterns
58 Source: North Dakota Pipeline Authority, RBN Energy – September 2013
59
Oil Sands
Hardisty, AB
Heavy/Sour Crude Logistics and Price Differentials – October 2013
$69
Heavy/Sour at TX GC Mexican Maya (ship): $101 WCS (pipe): $87 WCS (rail): $93
Crude Prices from October 2013 Sources: EIA, CME Group, PLG analysis (Google Earth) 59 Mexican Maya
Marine
PADD III Demand
7,650 kbpd
PADD V Demand
2,400 kbpd Light/Sweet
Heavy/Sour
Light/Sweet
Heavy/Sour
3,250 kbpd
Heavy/Sour
Light/Sweet
PADD II Demand
TX Gulf Coast Refiners
Pacific Northwest Refiners
California Refiners
Midwest Refiners
Rail Pipeline
Clearbrook, MN
Chicago, IL
Spread Dec. 2012 October 2013 Change Mexican Maya - WCS $33.55/bbl $31.50/bbl -$2.05/bbl
60
Light/Sweet Crude Logistics and Price Differentials – October 2013
Bakken
Permian
Eagle Ford
East Coast Refiners
Pacific Northwest Refiners
California Refiners
TX Gulf Coast Refiners
LA Gulf Coast Refiners
$6
Light/Sweet at TX GC Bakken (pipe): $104 Brent (ship): $112 WTI (pipe): $109
Light/Sweet at PNW Bakken (rail): $106 Brent (ship): $112
Light/Sweet at EC Bakken (rail): $108 Brent (ship): $111
Light/Sweet at LA GC Bakken (rail): $108 LLS (local): $106
Brent
ANS
Brent
60
Crude Prices from October 2013 Sources: EIA, Bloomberg, Baytex Energy, CME Group, PLG analysis (Google Earth)
PADD I Demand
PADD III Demand
7,650 kbpd
PADD V Demand
2,400 kbpd
1,050 kbpd
Light/Sweet
Heavy/Sour
Light/Sweet
Heavy/Sour
Light/Sweet
Heavy/Sour
Marine
Rail Pipeline
Cushing, OK
Chicago, IL
Clearbrook, MN
St. James, LA
$93 (wellhead)
WTI:$103
Spread Dec. 2012 Oct. 2013 Change Brent - WTI $21.83/bbl $6.65/bbl -$15.18/bbl LLS - WTI $20.00/bbl $2.50/bbl -$18.50/bbl WTI - Bakken (Clearbrook) $3.00/bbl $10.00/bbl $7.00/bbl
61 61
Looking Ahead: North American Crude Oil Logistics
» A “new normal” in crude oil flows will emerge in conjunction with continued North American oil production over the next five years § Continued shifts of mid-continent light/sweet to coastal destinations § New modes and infrastructure to get Canadian bitumen to USGC, with or without
Keystone XL § Permian, Eagle Ford to meet USGC light/sweet demand; Bakken flows primarily
east-west § Significant oversupply of light/sweet and super-light grades § Continued major investments in midstream logistics operations and assets
» Expect eventual government approval of light/sweet crude oil and condensate exports on a limited basis, similar to LNG
» Primary threats to crude by rail business 1. Narrow WTI-Brent spread (less than $10/bbl) 2. Glut of Permian and Eagle Ford light sweet oil displacing rail volumes to USGC
to Gulf Coast (but somewhat offset by new rail deliveries from Oil Sands) 3. Continued pipeline development 4. Water-borne Eagle Ford crude deliveries to USEC Key
Drivers
Supply Sources
Oil Prices
Destination Markets
Capital
62
Looking Ahead: Crude Oil Anticipated Production Growth and Product Flows
Sources: BENTEK Energy, CAPP, Railroad Commission of Texas, ND Pipeline Association, PLG Analysis (Google Earth)
= Current 2013 = Future 2017
Anticipated Production Growth (000 bbl/d)
Permian 1,680 1,200 +40%
1,600 800 Eagle Ford
+100%
Bakken +56% 871
1,363
Marine
East Coast Refiners
Oil Sands
2,590 1,985 +30%
Hardisty, AB
Cushing, OK
LA Gulf Coast Refiners
Light/Sweet
St. James, LA
Rail Pipeline
Pacific Northwest Refiners
California Refiners
TX Gulf Coast Refiners
Heavy/Sour
Clearbrook, MN
Chicago, IL
Canadian East Coast Refiners
Export Terminal
62
63
Thank You! For follow up questions and information, please contact PLG:
+1-312-957-7757 / [email protected]
Taylor Robinson, President
Graham Brisben, CEO
Jean Arndt, Vice President
Jeff Dowdell, Senior Consultant
Gordon Heisler, Senior Consultant
Jeff Rasmussen, Senior Consultant
Jay Olberding, Analyst
This presentation is available at: WWW.PLGCONSULTING.COM
Professional Logistics Group
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