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PLG BMO Shale Energy Presentation

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  • 1. Professional Logistics Group Oil & Natural Gas: The Evolving Freight Transportation Impacts Prepared for BMO Equity Research January 14, 2013 1
  • 2. About PLG Consulting»  Boutique consulting firm specializing in logistics, engineering, and supply chain §  Established in 2001 §  Over 80 clients and 200 engagements §  Significant shale development practice since 2010»  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»  Specializing in the logistics of §  Oil & gas §  Chemicals & plastics §  Wind energy & project cargo §  Bulk commodities (minerals, mining, agricultural) §  Industrial & consumer goods 2  
  • 3. The Shale Development Gold Rush»  Other recent energy “boom” events with major transportation impacts»  Common characteristics §  New technology breakthroughs and/or dramatic market shifts §  Speed to market is paramount §  Rush of capital and new players §  Continuous change and evolution in both technology and markets §  Logistics and related infrastructure of greater importance in shale development, and therefore a major platform for competition and strategy 3  
  • 4. Hydraulic Fracturing and Horizontal Drilling 4
  • 5. Hydraulic Fracturing Equipment Staging Area Frac Tanks/Fluid Storage Data Van Chemical Trucks Blender Pump Trucks Sand Storage UnitSource: JPTOnline.org 5
  • 6. North American Shale Plays 6
  • 7. Shale Driving Growth in Natural Gas and Crude Oil Production»  1,762 rigs in operation as of January 4, 2013 U.S.  Monthly  Crude  Oil  Produc@on  »  Rush of capital into the industry 7500   Million  Barrels/Day   Oct-­‐2012  »  700% increase in shale gas production since 2007 7000   6500   6820  »  Domestic oil production at 14-year high (6.8MM bbl/d) 6000   5500   5000  »  “Unconventional” becomes “conventional” by 2015 4500   4000   3500   3000   Oct-­‐99   May-­‐00   Dec-­‐00   Jul-­‐01   Feb-­‐02   Sep-­‐02   Apr-­‐03   Oct-­‐06   May-­‐07   Dec-­‐07   Jul-­‐08   Feb-­‐09   Sep-­‐09   Apr-­‐10   Jun-­‐04   Jun-­‐11   Mar-­‐99   Mar-­‐06   Jan-­‐98   Jan-­‐05   Jan-­‐12   Nov-­‐03   Nov-­‐10   Aug-­‐98   Aug-­‐05   Aug-­‐12   GAS OIL THERMAL Source: EIA 2012 Source: EIA 2012 Source: Baker Hughes 2013 7
  • 8. Natural Gas & Petrochemical Supply Chain Petrochemical Refined Crude Processing Polymers Products Olefins Polybutadiene Polypropylene Polyethylene Chemical Ethylene Propylene Butylene NGLs Feedstocks New “game Petrochemicalschanging” N.A. cost advantage due to Manufacturingshale development Many Power Aromatics Ammonia Others Intermediates become consumer and Generation industrial productsNatural Gas Industrial Use Process Consumer Product Use Consumers Logistics Flow 8  
  • 9. Potential Plastics Supply Chain Lordstown HDPE Calculated Cost Assembly 2500 Plant 2000 Component 1500 $/TonManufacturing Resin Cracker 1000 Plants 500 0 Gas Wells Sources: CMAI, TopLine Analytics, and Alembic analysis, 2012»  Low cost natural gas and NGLs with local processing would give this region a tremendous material and manufacturing cost advantage»  Oversupply of ethane expected to continue indefinitely 9  
  • 10. Shale Gas Will Drive Steel Manufacturing Comeback in US»  Shale gas boom makes direct-reduced iron steel economical §  DRI plants viable with growth in 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»  U.S. Jobs and International Investment §  Steel production in the U.S has shrunk 3.4% since 2008 –  Compare to 14% growth in steel production internationally §  At least five new DRI steel plants being considered in the U.S. §  Both domestic and international firms investing in the technology §  Initial investments create up to 500 jobs and 150 permanent employees»  Reciprocal Growth §  Increased demand for U.S. steel creates greater demand for U.S. gas §  Joint venture between Nucor Corp. and Encana Corp. commits $3 billion to development of new gas wells to support DRI plants §  DRI-derived steel of higher quality than that created from recycled scrap, further driving demand 10  
  • 11. Shale Gas Development Impact on Fertilizer Market»  Natural gas as ammonia feedstock for fertilizer §  Ammonia produced from cheap natural gas is used in fertilizers §  Reducing the cost of natural gas drives down ammonia and, by extension, fertilizer costs §  Cheap U.S. natural gas means billions in investment for new domestic fertilizer plants»  Natural gas glut could be panacea for American farmer’s fertilizer needs §  Increased demand for corn, soybeans has driven fertilizer costs higher §  Excess natural gas supply can be utilized to produce greater volumes of fertilizer more economically»  New technology helps reduce natural gas waste §  Mobile ammonia plants being developed could allow ammonia (for use in fertilizer) to be produced at well heads §  Mobile plants capture natural gas that would otherwise be burned off §  Reducing fertilizer costs would help drive agricultural commodity prices lower by reducing capital requirements for American farmers 11  
  • 12. Shale Gas Development Impact on Fertilizer Market (continued)»  Natural gas is a feedstock for ammonia production §  Ammonia produced from natural gas is used in fertilizer production §  Reducing the cost of natural gas drives down ammonia and, by extension, fertilizer costs»  Cheap U.S. natural gas means billions in investment for new domestic fertilizer plants, displacing imports –  Orascom’s Iowa Fertilizer Company new plant in Wever, Iowa –  CHS’ new plant in Spiritwood, North Dakota –  Ohio Valley Resources new plant in Spencer County, Indiana –  Yara’s new plant in Belle Plaine, Saskatchewan –  North Dakota Grain Growers Association’s new plant to be located in the Williston Basin –  CF Industries’ expansions at Donaldsonville, Louisiana and Port Neal, Iowa –  PotashCorp’s resumption of ammonia production at Geismar, Louisiana –  Expected announcement from Agrium, with plant likely in either Kentucky or Missouri»  If announced plant constructions are completed, imports of nitrogen-produced fertilizers could be reduced to “near zero” by 2018 12  
  • 13. 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
  • 14. Correlation of Operating Rig Count with Sand and Crude Shipments 120,000   2500   OperaEng  On  Shore  Rigs   All  Sand  Carloads   Petroleum  Carloads   100,000   1,972   1,948   2000   1,911   1,864   1,814   1,798   1,695   1,691   1,691   Opera@ng  Onshore  Rigs   1,665   80,000   1,604   Sand  Carloads   1,467   1500   1,270   1,299   60,000   1,073   939   1000   886   40,000   500   20,000   0   Quarterly  Data   0   2007   Avg.   2008   Avg.   2009   2010   2011   2012   2013  STCC 14413 (sand) and 13111 (petroleum) Data sources: US Rail Desktop, Baker Hughes 14
  • 15. All Sand Handled by Railroad 40,000   35,000   30,000   Carloads   25,000   BNSF   UP   20,000   NS   CN   15,000   CPRS   CSXT   10,000   KCS   5,000   0   2008   2009   2010   2011   2012   Quarterly  Data  STCC 14413 Source: US Rail Desktop 15  
  • 16. Sand Mining Overcapacity: New Reality »  Proppant processing and shipping activity in Western and West Central Wisconsin counties §  Chippewa §  Barron §  Trempealeau §  Jackson §  Monroe §  Crawford »  New announced projects §  Superior Silica Sand – Clinton, WI §  $35MM main line rehabilitation by CN §  U.S. Silica – Sparta, WI §  Smart Sand – Oakdale, WI §  Pattison – Prairie du Chien, WI »  Minnesota areas also active §  Southeastern border along Mississippi River §  Western Twin Cities »  Established Illinois companies seeing significant upturns in volumes and financial returnsSource: Federal Reserve Bank of Minneapolis, July 2012; PLG analysis 16
  • 17. Changes in Rail Shipment Pricing Q3 2011 vs. Today - Sand»  Since Q3 2011, have seen an overall rail price increase of 10 - 14% in public pricing (varies by corridor)»  In the 600-1,300 mile range, rates vary from $0.045 - $0.074 per ton-mile for manifest shipments»  Shippers who are willing to ship unit trains and make volume commitments have realized significant savings with longevity over public pricing»  Western carriers are driving single line hauls to Eagle Ford via pricing differentials»  Canadian and Eastern carriers are aggressively working to grow their markets by providing very competitive pricing and securing sand originations §  CN/Superior Silica Sands – Poskin, WI»  Major sand providers are establishing “in the play” transloading facilities to provide ready access to product §  U.S. Silica - East Liverpool, OH Source: PLG analysis 17
  • 18. Sand Railcar Market Conditions»  New-build market has run its course §  Much smaller backlog –  3Q 2011: 10,000 cars, ten month wait –  Today: no significant wait §  Significant drop off from ~14,000 new cars per year –  2013 closer to 2,000-3,000 new cars §  No new spec building by lessors – all deal specific now §  Normalized pricing: older cars less expensive than new §  Some new cars going into storage»  Lease market also post-peak §  Available inventory from multiple directions –  Lessors, builders, oversubscribed shippers §  Existing 286K cars available now §  Cars with sub-optimal specs (grain, <286K, cement) are being phased out of frac sand fleet §  Creditworthiness an important criteria»  Long-term horizon §  Some signs of activity in cement market, may help offset remaining surplus of sand cars §  Optimism in industry that sand car demand will strengthen in 2013 18
  • 19. Processed Sand Total Delivered Cost»  Benchmark cost with well-executed »  Potential for significant cost add- performance ons caused by strategic and §  Example unit train movement from Wisconsin to tactical issues Texas with total delivered cost of approx. $180/ton §  Logistics drives ~60% of total delivered sand cost §  Sub-optimal logistics network design or infrastructure -  Manifest service (rail) -  Multi-carrier vs. single line haul (rail) -  Equipment/driver shortages §  Poor planning and/or execution -  Rail and/or truck demurrage costs –  Performance penalties §  Uncompetitive sand price §  Poor sand quality Source: PLG analysis 19
  • 20. 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%»  Crude Oil §  Bakken play as a model §  Surging Permian and Eagle Ford development §  Strong potential for Utica play (currently 2-3 years behind Bakken) 20
  • 21. Bakken Oil Production - History 600000 ~682,000 BPD October 2012 500000 400000Barrels Per Day 300000 First outbound unit train shipment December, 2009 200000 100000 0 1952 1962 1972 1982 1992 2002 2012 Source– North Dakota Industrial Commission July 2012 North Dakota Department of Mineral Resources July 2012 Year 21
  • 22. Bakken Oil Production - Forecast TodaySource: North Dakota Oil and Gas Division May 2012 22
  • 23. Bakken vs. Peer Crude Oils»  Bakken oil is a light, sweet crude with low sulfur content and low viscosity §  Requires less downstream processing §  Equal in quality to benchmark WTI §  Higher gas, jet, and distillate yield than peer crudes Source: RBN Energy 2012»  Already a “game changer” in global oil market §  Bakken and WTI trading at ~$20/bbl less than Brent §  Increased unit train receiving capacity (St. James, LA, Pt. Arthur, TX, Cushing, OK, Albany, NY, Philadelphia, Bakersfield, CA, St. John, NB, Anacortes, WA, Ferndale, WA) coming on line to displace waterborne crudes §  Some analysts forecasting Canada and US crude oil self-sufficiency and prices well below global levels by 2017 Source: EIA 2012 23  
  • 24. Bakken Crude No Longer “Stranded” Due to Logistics Crude by Rail ND Production Crude by Rail»  Change in past 14 months Share (bpd) (bpd) §  November 2011: Dec. 2010 15% 273,800 41,070 –  2012 Bakken discount vs. WTI have ranged from $8-12 bbl –  Undervalued due to logistics constraints “stranding” the oil Dec. 2011 23% 470,290 108,167 §  January 2013: –  Bakken vs. WTI near even to ~$4 discount due to improved June 2012 40% 610,000 244,000 logistics»  Significant expansion of crude by rail August 2012 48% 635,127 317,564 terminal capacities in 2011- 2012 October 2012 50% 682,393 341,197»  Crude by rail now a major market factor Bpd = Barrels per Day Source: North Dakota Industrial Commission, PLG analysis»  Tank car availability/lead time - major short term entry barrier §  Current order backlog runs to 2Q 2014 §  Major purchases by oil majors and midstream companies §  Extremely tight market with very high lease rates 24
  • 25. Crude Oil by Rail Volume Growth 50,000   45,000   40,000   35,000   Carloads   30,000   BNSF   UP   25,000   CPRS   20,000   CN   CSXT   15,000   KCS   10,000   NS   5,000   0   2008   2009   2010   2011   2012   Quarterly  Data  Source - US Rail Desktop 25
  • 26. Crude Oil by Rail – North Dakota Terminals (Existing and planned by December 2012) Loading Capacity Rail Facility Location (Barrels per Day) Carrier Musket Corp Dore 60,000 BNSF Savage Services Trenton 60,000 BNSF Red River Supply Williston 10,000 BNSF Hess Oil Tioga 60,000 BNSF Plains All American Manitou 65,000 BNSFBakken Transload (Plains) Ross 10,000 (65k Q2 2013) BNSF EOG Stanley 65,000 BNSF Basin Transload Zap 20,000 BNSF Bakken Oil Express Dickinson 100,000 BNSF Enserco Gascoyne 10,000 BNSF Rangeland Epping 65,000 BNSF Enbridge Berthold 10,000 (70k Q2 2013) BNSF Great Northern Fryburg 65,000 BNSF BNSF Total Capacity 600,000 Global Stampede 60,000 CP Dakota Plains New Town 40,000 CP US Development Van Hook 35,000 CP CP Rail Total Capacity 135,000 Total Crude by Rail Capacity 735,000 26   Source: PLG analysis
  • 27. North Dakota Class I Railroads and Crude Oil Terminals 27  
  • 28. Shale Related Rail Traffic Still Small Relative to Coal Volumes Rail  Shipments:  Coal,  Sand  &  Crude   2,500,000   2,000,000   Carloads   1,500,000   1,000,000   Sand   Crude   500,000   Coal   0   2008   2009   2010   2011   Sand   2012   Quarterly  Data        Source: US Rail Desktop 28  
  • 29. Crude Oil Pipelines – Existing and FutureSource – CAPP Report 2011 29  
  • 30. Bakken Area Outbound PipelinesCurrent Capacity ( Q1 2013) - 440,000 bpdAnnounced pipeline capacity expansionsCompany Project BBLs/day Expected in Name Capacity service dateEnbridge Berthold Expansion 145,000 1Q 2013 Sandpiper 225,000 2015Plains All American Bakken North 50,000 1Q 2013Saddle Butte High Prairie 150,000 1Q 2014Oneok Partners Bakken Express 200,000 2015 Bakken Express ‘postponed’ November 30, 2012 due to lack ofTrans Canada Bakken Marketlink 100,000 2015 subscription Keystone XL 830,000 2015? Total New Pipelines: 1,500,000NEW pipeline capacity expected operational: 2013 195,000 2014 150,000 2015 325,000 TBD (K XL) 830,000 Bpd = Barrels per Day Source: PLG analysis, North Dakota Governors Pipeline Summit 2012 – presentation materials 30  
  • 31. Bakken Production vs. Outbound Logistics: 2012–2014 Projection Total Excess Year ND Production Pipeline Rail Terminal Rail Carrier ND Refinery Outbound & Logistics Forecast (Bpd) Capacity* Capacity Capacity Consumption Refinery Capacity Capacity 2012 700,000 440,000 730,000 1,200,000 60,000 1,230,000 530,000 2013 790,000 635,000 800,000 1,300,000 60,000 1,495,000 705,000 2014 860,000 785,000 850,000 1,350,000 60,000 1,695,000 835,000* Excludes Keystone XL Bpd = Barrels per Day Source: PLG Analysis 31
  • 32. Crude Oil by Rail vs. Pipeline»  Current pipeline options ~ 30-45% lower cost vs. rail»  Near-term offsetting rail advantages: §  Site permitting, construction is much quicker and easier §  Much lower capital cost and scalable §  Shorter contracts §  Transit to destination - 5-7 days via unit train vs. 30+ days via pipeline (between Bakken and US Gulf Coast) §  Origin and destination flexibility/opportunistic to new  $16.00      $14.70      $14.00     market niches $11.50    $10.50     Dollars Per Barrel  $12.00    »  Long-term challenges that will affect rail  $10.00     volumes and margins:  $8.00      $6.50      $6.00     §  Pipeline expansions  $4.00      $2.00     §  Bakken-WTI price equilibrium  $-­‐         Pipeline to Rail to Pipeline to Pt Rail to Pt §  Any significant narrowing of price differential between Cushing Cushing Arthur Arthur Brent and WTI Source: PLG analysis 32
  • 33. Crude Oil Logistics – Near Term Outlook»  Logistics capacity exceeds production and will continue to keep pace in future»  Crude by rail cost premium of .5x – 2.0x is not currently deterring volume moves»  Crude by rail is a key outbound logistics mode near-term; pipeline share of outbound Bakken production will grow annually and volume will settle out by direction (rail: east-west; pipeline: north-south)»  Expected Seaway pipeline 250,000 bpd expansion in 1st quarter 2013 will relieve much Cushing congestion and likely will put additional pressure on railroad pricing to compete with expanded pipeline economics and availability»  No pipelines are likely to replace rail in the Bakken supply chain to the East and West coasts 33
  • 34. Looking Ahead: Key Questions for Oil & Gas Supply Chain NGL and Natural Gas Pipelines»  Shale play dynamics Dawn §  Influenced by supply/demand market fluctuations §  Crude vs. dry gas vs. NGL §  Potential environmental concerns Mariner West Nexus Mariner East»  Where are the destinations for further ATEX processing? ?BlueGrass? §  Crude oil refineries – sweet vs. sour processing §  NGL fractionation §  Petrochemical manufacturing investments Source: RBN Energy, LLC §  Increased CNG demand RBN Energy – 2012 §  Crude, NGL, and LNG exports»  Will transportation services, assets, and infrastructure continue to meet demand? §  Pipeline locations and capacity §  Road and rail infrastructure §  Waterway availability §  Fleet assets §  Terminals and storage Source: Waterborne Energy Inc. Data in $US/MMBtu 34  
  • 35. 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 Jeff Dowdell, Senior Consultant +1-732-995-6696 / jdowdell@prologisticsgroup.com Gordon Heisler, Senior Consultant +1-215-620-4247 / gheisler@prologisticsgroup.com Jeff Rasmussen, Senior Consultant +1-317-379-5715 / jrasmussen@prologisticsgroup.com This presentation is available at: WWW.PROLOGISTICSGROUP.COM 35