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    Plg argentina frac supply chain Plg argentina frac supply chain Presentation Transcript

    • Professional Logistics Group Shale Development in Argentina: The Evolving Supply Chain Prepared for April 17, 2013 Buenos Aires, Argentina 1
    • About PLG Consulting» Boutique consulting firm specializing in logistics, engineering, and supply chain  Established in 2001  Over 90 clients and 200 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
    • Argentina Resources vs. ROW» Argentina has 774 Tcf of technically recoverable shale gas  This is the world’s third largest assessed endowment, behind only China (1,275 Tcf) and United States (862 Tcf)» 2.5 billion barrels of proved oil reserves South American Shale Gas Resources» Potential for dramatic increases in production through shale development» Extensive existing energy infrastructure Source: Americas Petrogas 3
    • Neuquén Basin» Neuquén Basin is focal point for unconventional development in Argentina  Most “tangible” shale play outside of North America  Most productive basin (estimates) – 260,000 bbls/day & 2.6 Bcf/day» Gas potential  407 Tcf technically recoverable shale gas» Vaca Muerta liquid potential  800 MMbbls of potential recoverable oil in Vaca Muerta Shale  Condensate in transition windows Source: Americas Petrogas 4
    • Vaca Muerta » In 2011, YPF announced a large discovery of shale oil in the Loma La Lata field in the Neuquén basin in the Vaca Muerta shale formation  “High quality crude in over-pressured conditions, and with high thickness….” - YPF  “Better prospect than US comparable basin….” - YPF » Estimated size of which is to be believed 800 million barrels of recoverable shale oil Source: Americas Petrogas 2013 Source: YPFSource: Azabache Energy Inc. 5
    • Vaca Muerta vs. Bakken – Single Well Lifetime Production ComparisonVaca Muerta Horizontal Well (10 fracture stages) Bakken Horizontal Well (28-32 fracture stages)Source: CAP IV SEN Source: J. Mason – Oil Production Potential of the North Dakota Bakken (2012)Estimated Ultimate Recovery Estimated Ultimate Recovery@ 25 years: 389,000 bbl @ 25 years: 500,000 bbl 6
    • Investments in Argentina Shale Development» YPF push to develop Neuquén Basin  YPF’s plan is to spend $35 billion through 2017 to aggressively develop Neuquén Basin  Plan to boost capital investments by 60 percent in 2013  Need to raise billions of dollars over next few years in order to aggressively develop shale» Chevron $1 billion deal with YPF for Vaca Muerta  Deal for an estimated 100 wells over 1 year period  YPF transfer 50% interest in two oil fields in Vaca Muerta  May eventually expand to ~2,000 wells for ~$15 billion» Bridas $1.5 billion deal with YPF for Vaca Muerta  Deal for an estimated 130 wells over 2 years  YPF transfer 50% of its rights in two oil fields in Vaca Muerta  Most of the development will involve shale oil, but there are also plans for exploitation of wet gas» Multinational E&P interest with fracking expertise entering the market 7
    • Resources and Experience Can Be Applied in Argentina» Expect far-ranging implications beyond oil and gas  Energy  Transportation  Manufacturing  Balance of Trade» Both opportunities and risks in global market  Fracking inputs  Well outputs and downstream products» Outside resources will need to be imported  Experienced personnel  New rigs  Drilling supplies, including proppants  Key learnings from N.A. shale development experience 8
    • The Shale Development Revolution – Big Picture New Technologies • Hydraulic Fracturing • Horizontal Drilling Market Drivers Continuous Evolution• Supply & Demand • Constant Change• Customers • Rapid Change• Price• Logistics 9
    • Hydraulic Fracturing and Horizontal Drilling 10
    • Hydraulic Fracturing Equipment Staging Area Frac Tanks/Fluid Storage Data Van Chemical Trucks Blender Pump Trucks Sand Storage UnitSource: JPTOnline.org 11
    • Shale Development Supply Chain and Downstream ImpactsInputs >> Wellhead >> Direct Output >> Thermal >> Fuels >> Raw Materials >> Downstream Products All Manufacturing Generation Steel Process Feedstocks Proppants Fertilizer (Ammonia) Gas Home Heating (Propane) Methanol OCTG Other FuelsChemicals NGLs Feedstock (Ethane) Chemicals Water Byproduct (Condensate) Crude Petroleum Products Cement Petrochemicals Other Fuels Gasoline 12
    • Hydraulic Fracturing Materials Inputs and Logistics – Per Well Source to Transloading toMaterials Waste Water Transloading Wellhead Site ~500 Total Proppants 40 160 TruckloadsOCTG (Pipe) 5 20 Chemicals 2 8Clean Water/ Oil/Gas/NGLs Local source ~1,000 Cement Truck, Rail, 47 Total ~1,200 Total Pipeline Railcars Truckloads 13
    • Proppants Demand» Shale development in Argentina just in Vaca Muerta: Proppants and Water Demand very early stages» Demand for imported proppants will increase significantly» Optimal logistics model for proppants and water will have to be “invented” Source: Azabache Energy Inc. 14
    • Proppants Supply and Logistics» Need to import proppants  Proppants are currently imported from Brazil and USA, companies are looking at China  Curimbaba out of Brazil has a very large deposit of high-grade bauxite which is used to make ceramic proppants  The USA has large deposits of high quality frac sand and experience with USA’s shale plays  China also has numerous ceramic proppant producers» Logistics challenges for proppants  Neuquén basin is located in remote desert  Proppants coming from Brazil can take up to 45 days to arrive on site via rail and trucks on unpaved roads» Despite challenges, a range of options exist for both natural sand and ceramics  Global market trends that Argentina shale plays can take advantage of in both supply and logistics  Existing transportation infrastructure in Argentina  Over time, logistics models will evolve and innovate 15
    • Processed Sand Total Delivered Cost» Benchmark cost (US) with well-executed » Potential for significant cost add-ons performance caused by strategic and tactical issues  Example unit train movement from Wisconsin to Texas  Sub-optimal logistics network design or with total delivered cost of approx. $180/ton infrastructure  Poor planning and/or execution  Logistics drives ~60% of total delivered sand cost  Uncompetitive sand price  Poor sand quality » N.A. logistics model for proppants has evolved to reduce costs, improve efficiency Source: PLG analysis 16
    • Innovation Case Study: Ceramic Proppants from China» Ceramic vs. natural sand decision driven by technology, cost (yield)» Phase one innovation optimizes logistics of existing containerized supply chain  Route and terminal changes  Use of boxcars  Net payload improvements  Natural flow of containers exploited  45% cost reduction impact» Phase two innovation converts to breakbulk  Additional 12% cost reduction impact Import DestinationOrigin Export 17
    • Break Bulk Logistics FlowOrigin Port of Export Loading Ocean Transport Port of Entry Destination Import Destination Origin Export 18
    • N. A. Correlation of Operating Rig Count with Sand and Crude Shipments 120,000 2500 Operating On Shore Rigs All Sand Carloads Petroleum Carloads 100,000 1,972 1,965 1,948 1,911 2000 1,864 1,814 1,798 1,763 1,762 Operating Onshore Rigs 1,695 1,691 1,665 80,000 1,604Sand Carloads 1,467 1500 1,270 1,299 60,000 1,073 939 1000 886 40,000 500 20,000 0 0 2007 Avg. 2008 Avg. 2009 Quarterly Data 2010 2011 2012 2013 STCC 14413 (sand) and 13111 (petroleum) Data sources: US Rail Desktop, Baker Hughes 19
    • U.S. Sand MiningOvercapacity: New Reality » Growth in Wisconsin sand mining industry has slowed  60 mine/processing operations proposed June 2011 – June 2012  Four (4) proposed June 2012 – January 2013 » Decline in sand pricing » Excess supply and processing capacity 20
    • Proppant Sourcing and Logistics Options» Multiple sourcing options  Ceramic from Brazil From USA  Ceramic from China From Brazil  Natural sand and ceramic from US» Viable port, liner service to Bahia Blanca  Existing container and breakbulk service  Dry bulk vessels would require significant investments  Storage and handling systems  Tank trucks From China» Existing rail infrastructure 21
    • Representative Transportation Costs – Proppants to Bahia Blanca Port ~$55/mt ~$10/mt ~$90/mt ~$140/mt ~$100/mt ~$110/mtCeramic via containerNatural sand or ceramics via break bulkNatural sand or ceramics via container 22
    • Overcapacity of Pumping HHP in the USA» Estimated 25% excess capacity end of 2012  Declining rig count  Move from gas plays to liquid rich plays has caused an oversupply of pumping capacity since liquid plays typically require lower pumping capacities  Improved efficiencies of frac operations  Overbuild of pumping capacitySource: Baker Hughes Source: Baker Hughes 23
    • Overcapacity of Pumping HHP in the USA (continued)» Capacity outlook  “Without a meaningful jump in rig count, it’s going to take several quarters to chew through the excess horsepower capacity” - Baker Hughes CEO, March 19, 2013  In December 2012, Halliburton estimates that countries outside North America hold more than 80% of the world’s shale gas reserves but under 20% of the pressure pumping capacity that is required to extract it» Pricing pressure  The decline in natural gas drilling and influx of equipment into the industry has resulted in pricing pressure for hydraulic fracturing services which is expected to persist through 2013  Pricing pressure has been seen in all USA basins» Opportunity for redeployment of equipment and trained personnel to international shale plays 24
    • 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% – Condensate (liquid hydrocarbons)» Crude Oil 25
    • Potential Shale Development Impact on Domestic Fuel Supply» Over 50% of electricity generation in Argentina is fueled by natural gas» Despite major proven reserves, Argentina is net importer of natural gas  Fuel imports in 2011 were $9.4 billion  Local demand in Argentina and large Government of Argentina focus to reverse energy sector’s recent decline – Last November, Argentina announced wellhead prices would rise to $7.50/MMBtu for “new gas” from wellhead average of about $2.5/MMBtu in the Neuquén Basin  Government is looking to become net fuel exporter 26
    • Prospects for Natural Gas Exports» Global market conditions represent significant long- term demand for LNG  Asia, Europe primary markets» Opportunity for Argentina if US continues to restrict exports Source: TotalSource: Total Source: Waterborne Energy Inc. Data in $US/MMBtu 27
    • Shale Development NGL Impacts» “Wet gas” sources identified in Neuqin Basin» NGLs fractionation facilities proximal to production  “Y-grade” must be separated into purified products» Abundant supplies have sparked chemical industry renaissance in US  Ethane is “cracked” to make ethylene, the most basic building block in the chemicals supply chain HDPE Calculated Cost  USA is now the low-cost producer of ethylene-based chemicals due 2500 to abundant supplies of ethane from shale plays (up to 60% raw 2000 materials cost advantage) $/Ton 1500  Over $15B in new announced ethylene expansions will come on- line over the next five years, increasing capacity by 33% (11 1000 MMmt) 500  Up to 40% of new chemical production will be exported 0» Similar opportunity exists for Argentina’s already significant chemical industry Sources: CMAI, TopLine Analytics, and Alembic analysis, 2012 28
    • Natural Gas & Petrochemical Downstream Products Feedstock/ Intermediary Low-Density Food packaging, film, Finished Polyethylene trash bags, diapers, toys Products House wares, crates, High Density drums, food containers, Polyethylene bottles. Siding, windows, Ethylene Vinyl Chloride PVC frames, pipe, medical Dichloride tubing Antifreeze Pantyhose,Natural Gas, Ethylene Ethylene carpets, clothing Fibers OIl Oxide Glycol PET Miscellaneous Bottles, film Ethane, Ethyl Polystyrene StyreneNaphtha, etc. Benzene SAN Insulation, cups SBR Linear Latex Instrument lenses, Detergents house wares Ethylene Alcohols Miscellaneous Vinyl Acetate Tire, hose Adhesives, coatings, textile/ paper. finishing, flooring Medical gloves, Miscellaneous carpeting, coatings
    • Potential Shale Development Benefits for Argentina’s Chemical Industry» Chemicals already an important industry in Argentina, but challenged with raw materials supply» New feedstocks from shale development may help reverse chemicals trade deficit» Argentina could have advantaged position in Latin America vs. US chemical exports» Potential for expanded trade with Europe and Asia Source: HSBC Source: HSBC 30
    • Shale Development Impact on Crude Oil Market Dynamics» Similar to natural gas, shale development represents opportunity for increased exports and trade balance impact» Argentina will be advantaged by continued US restrictions on crude exports, particularly for Source: YPF shale peer light/sweet grades» However, expect added competition from Brent sources» Neuquén Basin sits on or near conventional plays Source: BG Group already supported by existing infrastructure 31 31
    • Conclusions • New Technologies Hydraulic Fracturing » Argentina still in early stages of shale development – expect rapid and • Horizontal Drilling continuous change » Sourcing and logistics model for large-scale fracking still needs to be designed and implemented  Water Market Drivers Continuous•• Supply & Demand Customers Evolution  Proppants  HHP/rigs• Price • Constant Change• Logistics • Rapid Change » Like the technology and markets themselves, logistics will evolve and reduce costs, improve efficiency over time » Fortunately, a viable logistics infrastructure already exists in Argentina » Global market conditions in logistics and sourcing can work to Argentina’s advantage Source: YPF  Proppants  HHP“I wouldnt rule out that 2013 is going to  Primary outputsbe a painful year for us from the point of  Downstream productsview of getting hold of equipment, fromthe point of view of getting the people ...but when youre growing its a pain that » Opportunity and benefits can extend well beyond oil and gasyou willingly tolerate.”-YPF President Miguel Galuccio 32 » Leverage learning, experience, and resources of other shale plays
    • Professional Logistics Group Thank You!For follow up questions and information, please contact: Taylor Robinson, President +1-508-982-1319 / trobinson@prologisticsgroup.com Graham Brisben, CEO +1-708-386-0700 / gbrisben@prologisticsgroup.com Jean Arndt, Vice President +1-630-505-0273 / jarndt@prologisticsgroup.com Jay Olberding, Analyst +1-636-399-5628 / jolberding@prologisticsgroup.com This presentation is available at: WWW.PROLOGISTICSGROUP.COM 33