The Energy Opportunity in Oil & Natural Gas: Crude Oil is Only the Beginning


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On June 3, 2013, Gordon Heisler, Senior Consultant at PLG Consulting presented at the American Railway Development Association’s 107th Annual Meeting in San Francisco, CA. Gordon’s presentation, entitled “The Energy Opportunity in Oil & Natural Gas. Crude Oil is Only the Beginning,” analyzes and forecasts the dramatic impact of shale oil and gas which has upended traditional logistics and trading patterns in the energy industry, starting an industrial renaissance in the US.

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The Energy Opportunity in Oil & Natural Gas: Crude Oil is Only the Beginning

  1. 1. 1The EnergyOpportunity inOil & Natural Gas.Crude Oil is Only theBeginningGordon R. HeislerSenior Consultant, PLG ConsultingOnline: PLGConsulting.comPrepared forAmerican RailwayDevelopment AssociationJune 3, 2013 San Francisco, CAProfessional Logistics Group
  2. 2. » Boutique consulting firm specializing in logistics, engineering, andsupply chain Established in 2001 Over 100 clients and 250 engagements» Headquarters in Chicago USA, with team members throughoutthe US and with “on the ground” experience in: North America / Europe / South America / Asia / Middle East» Consulting services Strategy & optimization Assessments & benchmarking Transportation infrastructure & engineering Logistics operations M&A/investments/private equity» Key industry verticals: Energy Bulk Commodities Manufacturing Private equityAbout PLG Consulting2
  3. 3. Today’s Discussion» Domestic Shale Play overview» Shale drilling inputs and production – Natural Gas,Natural Gas Liquids (NGLs) and Crude Oil» Downstream products - growth opportunities» Bakken Shale impact on Crude Oil by Rail» Rail Development Opportunities3
  4. 4. The Shale DevelopmentRevolution – Big PictureDisruptiveTechnologies-Hydraulic Fracturing-Horizontal DrillingContinuousEvolution-Constant Change-Rapid Change-Difficult to predictMarketingDynamics-Supply & Demand-Customers-Product Price-Logistics4
  5. 5. Hydraulic Fracturing andHorizontal DrillingGreat YouTube Video by Marathon on Fracking
  6. 6. US Shale Plays6Gas:MarcellusHaynesvilleBarnettOil:BakkenEagle FordPermian BasinMost Active PlaysUticaNiobraraMississippi LimeEmerging Plays
  7. 7. Shale Driving Growth in NaturalGas and Crude Oil Production» 1,769 onshore rigs in operation (May 10, 2013)» Since 2010, crude oil production has increased 29%and natural gas production has increased 16%» Domestic oil production at 21-year high (7.2 MM bbl/d)7Source: Baker Hughes 2013Feb. 20137.18MM bpdU.S. Crude Oil ProductionSource: EIAGAS OIL THERMALSource: Baker HughesGAS OIL THERMALFeb. 20131.85 MM cubic ftU.S. Dry Natural Gas ProductionSource: EIA
  8. 8. 8Shale Development Supply Chainand Downstream ImpactsFeedstock (Ethane)Byproduct (Condensate)Home Heating (Propane)Other FuelsOther FuelsGasolineInputs >> Wellhead >> Direct Output >> Thermal >> Fuels >> Raw Materials >> Downstream ProductsGasNGLsCrudeProppantsOCTGChemicalsWaterCementGenerationProcess FeedstocksAll ManufacturingSteelFertilizer (Ammonia)MethanolChemicalsPetroleum ProductsPetrochemicals» Shale development impact on the rail industry is long-term, wide-ranging, and positive with only one exception
  9. 9. Hydraulic Fracturing Materials Inputsand Logistics – Per Well9MaterialsChemicalsClean Water/CementProppantsOCTG (Pipe)Source toTransloading2Local source405Transloading toWellhead Site8~1,0001602047 TotalRailcars~1,200 TotalTruckloadsOil/Gas/NGLsTruck, Rail,PipelineWaste Water~500 TotalTruckloads
  10. 10. Shale Play ProductFlows Outbound» Natural Gas Majority via pipelines, some trucks» Natural Gas Liquids (NGLs) Requires processing (fractionation) 3-9 gallons/MCF (thousand cubic feet)– Ethane ~42%– Propane ~28%– Normal Butane ~8%– Iso-Butane ~9%– Condensate ~13%» Crude Oil Bakken play as a model Surging Permian and Eagle Ford development10
  11. 11. Shale Development -NaturalGas Impacts» Shale gas is a game changer for USManufacturing Fracking results in oversupply; gas prices down 33%since 2010 Coal power plant closures, natural gas poweredelectricity growth» Low gas prices fueling industrial renaissance Impacts overall manufacturing cost of electricity; “Re-shoring” Specific sectors that use natural gas as a feedstock– Fertilizer– Steel11Source: EIASource: EIA
  12. 12. Coal vs Crude & Sand Trends:Carloads and RevenueTotal Coal Cars Handled$0$2$4$6$8$10$12$14$16$18-12345678910BillionsCarloadsMillionsCarloads RevenueTotal Crude & Sand Cars Handled12$0.0$0.5$1.0$1.5$2.0$2.5$3.0-100200300400500600700800900BillionsThousandsSand Crude RevenueSTCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop
  13. 13. Shale Gas Driving SteelManufacturing Comeback in US13» Shale gas boom makes direct-reduced iron steeleconomical DRI plants viable with growth and reduced price of 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 vs. traditional blast furnace DRI-derived steel is of higher quality than that created from recycledscrap, further driving demand» U.S. jobs and international investment Steel production in the U.S has shrunk 16% since 2008– Compare to 17% growth in steel production internationally– Domestic steel industry capacity running at 74% At least five new DRI steel plants being considered in the U.S. – noweconomical for the first time in 30 years due to low cost of natural gas» Announced new DRI plants Nucor Corp. and Encana Corp. JV in Louisiana - $700MM Voestalpine $700MM investment in Texas01,0002,0003,0004,0005,0006,0007,0008,0009,00010,0002008 2009 2010 2011 2012 2013ThousandTonnesU.S. Monthly Steel ProductionSource: World Steel Association
  14. 14. Shale Gas Development Impacton Fertilizer Market» Natural gas - primary feedstock for ammonia &Nitrogen fertilizer production» Lower gas prices directly benefit American farmers Increased demand for corn, soybeans has driven fertilizer costshigher Excess natural gas supply can be utilized to produce greater volumesof fertilizer more economically Increased domestic production displaces current imports» Cheap U.S. natural gas means billions in investmentfor new domestic fertilizer plants, displacing ~11 MMm/t of imports Orascom/Iowa Fertilizer Company - Wever, IA CHS - Spiritwood, ND Ohio Valley Resources - Spencer County, IN Yara - Belle Plaine, SK Canada North Dakota Grain Growers Association - Williston Basin, ND CF Industries – expansions at Donaldsonville, LA and Port Neal, IA PotashCorp - resumption of ammonia production at Geismar, LA Koch Fertilizer – Enid, OK 14
  15. 15. Shale Development Impact:Chemical Industry» Abundant ethane supplies have sparked chemicalindustry renaissance Ethane is “cracked” to make ethylene, the most basic buildingblock in the chemicals supply chain Over $95B in new announced petrochemical expansions will comeon-line over the next five years, increasing ethylene capacity by33% (11 MMmt) USA is now the low-cost producer of ethylene-based chemicalsdue to abundant supplies of ethane from shale plays (up to 60%raw materials cost advantage) Domestic end-use of materials, i.e. plastics, will expandsignificantly Up to 40% of new petrochemical output will be for export15Source: EIASources: CMAI, TopLine Analytics,and Alembic analysis, 2012
  16. 16. LNG Export Opportunity» Political/policy battle between domesticindustrial users and producers» Sabine Pass, LA and Freeport, TX nowpermitted for exports; more terminals inapplication phase 3.4 Bcf/day export capacity to come online by2015 Represents ~5% of projected US dry gasproduction» 20 additional terminal applicationstotaling 29 Bcf/day of export capacitypending before FERC16Source: Waterborne Energy Inc. Data in $US/MMBtu
  17. 17. Shale DevelopmentCrude Oil Impacts» Dramatic increases in US production due to fracking 7.2 MM bbl/day (2013 estimate) 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 North America should be crude oil independent by 2018 (total bbls produced)17Source: Morgan Stanley, February 2013Source: Morgan Stanley, February 2013
  18. 18. Crude Oil Loading andReceiving Terminals - 201018
  19. 19. Crude Oil Loading andReceiving Terminals - 201319
  20. 20. Bakken Production vs. Total TakeawayCapacity: 2013–2015 ProjectionYear ND ProductionForecast (Bpd)PipelineCapacityRail TerminalCapacityRail CarrierCapacityND RefineryConsumptionTotalOutbound &RefineryCapacityExcess LogisticsCapacity2010 360,000 280,000 115,000 600,000 58,000 453,000 93,0002013 850,000 565,000 990,000 1,300,000 68,000 1,623,000 773,0002015 1,150,000 1,075,000 1,040,000 1,350,000 90,000 2,205,000 1,055,000Source: North Dakota Pipeline Authority, PLG AnalysisBpd = Barrels per Day20
  21. 21. Crude Oil Pipelines:Existing and Planned21Source: CAPP Report, 2012» Current pipelines ex. Bakkenoperating below capacity» Fixed routes and long lead times arechallenged by new dynamic NA oilmarket 10 year+ commitments required for newbuild pipeline projects» Several natural gas pipelineconversions planned Trunkline (ETP) – Patoka, IL-St.James, LA Freedom (KM) – Permian Basin-Southern California Energy East (TransCanada) – Hardisty,AB-St. Johns, NB
  22. 22. Crude Oil byRail vs. Pipeline$6.50$12.00$10.50$15.00$-$2.00$4.00$6.00$8.00$10.00$12.00$14.00$16.00Pipeline toCushingRail toCushingPipeline toPt ArthurRail toPt ArthurDollarsPerBarrelSource: PLG analysis» Rail cost: 50-200% more expensive thanpipeline transport» 70% of Bakken crude oil leaves ND via Rail(March 2013),» Existing Bakken pipelines under utilized» Near-term offsetting rail advantages: Site permitting, construction much faster Lower capital cost Scalable Shorter contracts (2-3 year commitments vs. 10years for pipeline) Faster transit times Access to coastal areas not connected viapipeline Origin/destination flexibility Primary advantage: Tool of arbitrage for tradingdesksCost Comparison: Bakken to Cushing and USGC22
  23. 23. 23Shale Development Impact onCrude Oil Market Dynamics» Price differentials driving trading andlogistics patterns Bakken and WTI trading at ~$10-$15/bbl less than Brent;Alberta Bitumen trading at ~$30/bbl less than Brent E&P, midstream players willing to rapidly deploy significantcapital to enable access– Multi-modal logistics hubs in shale plays– New multi-modal terminals/trading hubs at destination markets (i.e.Cushing, OK, St. James, LA, Pt. Arthur, TX, Albany, NY, Bakersfield,CA) Refineries installing unit train receiving capability -particularly coastal refineries previously captive towaterborne imports (i.e. Philadelphia, PA, St. John, NB,Anacortes, WA, Ferndale, WA) Constantly changing trading and logistics patterns forlight/sweet mid continent crudes23KeyDriversDestinationMarketsOilPriceLogisticsCapital
  24. 24. 24Looking Ahead:North American Crude Oil» The gusher of new US light/sweet shale oil production madepossible by fracking has upended the traditional oil logistics andtrading patterns» The biggest current bottleneck: Railcars Current order backlog runs to mid 2015 Extremely tight market with very high lease rates Current crude by rail fleet ~30,000 railcars, or 1-1.5 MM bbl/day equivalent» A “new normal” in crude oil flows will emerge in conjunction withcontinued 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 withoutKeystone XL Permian, Eagle Ford to meet USGC light/sweet demand; Bakken flows primarily east-west Eventual government approval of crude oil exports on a limited basis, similar to LNG24Source: CME and Morningstar
  25. 25. Looking Ahead: Crude Oil AnticipatedProduction Growth and Product Flows25= Light/Sweet= Heavy/Sour= Pipeline= Marine= Rail= Storage terminal(s)= Refinery cluster – LightSweet/Intermediate= Refinery cluster – HeavySour/Intermediate= Current b/d (000)= Future b/d (000) additional by 2017+420123Bakken+855704Oil Sands+9821,615Eagle Ford+1,087352Permian+607514Source: BENTEK Energy, CAPP, Railroad Commission of Texas, PLG Consulting
  26. 26. 26Rail Site DevelopmentOpportunities» Fracking materials – transload sites» Crude oil terminals – loading terminals $ 3-80MM» Receiving terminals $ 25-75MM» Downstream facilities Steel production plants $700 million each Fertilizer production plants $1 billion each LNG export terminals $5 billion each Chemical production plants $ ??? Fractionation (gas) plants $200MM+ each» All facilities require inbound constructionmaterials, steel, fertilizer and chemical plants havein/out bound rail carloads
  27. 27. Thank You!For follow up questions and information, please contact:Taylor Robinson, President+1-508-982-1319 / trobinson@prologisticsgroup.comGraham Brisben, CEO+1-708-386-0700 / gbrisben@prologisticsgroup.comGordon Heisler, Senior Consultant+1-215-620-4247 / gheisler@prologisticsgroup.comThis presentation is available at:PLGConsulting.comProfessional Logistics Group27