PLG Presents to Midwest Association of Rail Shippers


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On July 9, 2013, CEO Graham Brisben presented PLG’s perspective of the shifting economy by examining the impact of crude by rail in today’s marketplace. More specifically, Graham discussed the impact of shale oil and gas which is upending traditional logistics and trading patterns in the energy industry which has started an industrial renaissance in the U.S.

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PLG Presents to Midwest Association of Rail Shippers

  1. 1. Professional Logistics Group Oil & Natural Gas: The Evolving Freight Transportation Impacts Prepared for July 9, 2013 Lake Geneva, WI Midwest Association of Rail Shippers
  2. 2. » 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 2
  3. 3. 3 The Shale Development Revolution – Big Picture Disruptive Technologies • Hydraulic Fracturing • Horizontal Drilling Continuous Evolution • Constant Change • Rapid Change Market Dynamics • Supply & Demand • Customers • Price • Logistics
  4. 4. Hydraulic Fracturing and Horizontal Drilling 4 » Rapid 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 » 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. Source: L. Maugeri, Harvard Kennedy School; PLG analysis
  5. 5. US Shale Plays 5 Gas: Marcellus Haynesville Barnett Oil: Bakken Eagle Ford Permian Basin Most Active Plays Utica (NGLs) Niobrara Mississippi Lime Emerging Plays
  6. 6. Shale Driving Growth in Natural Gas and Crude Oil Production » 1,759 rigs in operation in USA as of June 21, 2013 » 700% increase in shale gas production since 2007 » Domestic oil production at 21-year high (7.35 MM bbl/day) » IEA projects US to surpass Saudi Arabia in oil output, Russia in gas output by 2020 6Source: Baker Hughes 2013 GAS OIL THERMAL Source: Baker Hughes U.S. Crude Oil Production Source: EIA April 2013 7.35 MM bpd Source: EIA U.S. Natural Gas Annual Production 2012 24 Trillion cubic feet
  7. 7. 7 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 » Over $95B in new announced “energy intensive” industrial plant expansions will come on-line over the next five years » Shale development impact on the railcar industry is long-term, wide-ranging, and positive with only one exception
  8. 8. Hydraulic Fracturing Materials Inputs and Logistics – Per Well 8 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
  9. 9. 9 Correlation of Operating Rig Count with Sand and Crude Shipments STCC 14413 (sand) and 13111 (petroleum) Source: US Rail Desktop, Baker Hughes 1,695 1,814 1,270 886 939 1,073 1,299 1,467 1,604 1,6651,691 1,798 1,911 1,9721,9481,965 1,864 1,7631,7621,759 0 500 1000 1500 2000 2500 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 2007 Avg. 2008 Avg. 2009 2010 2011 2012 2013 OperatingOnshoreRigs Carloads Operating On Shore Rigs All Sand Carloads Petroleum Carloads
  10. 10. All Sand Handled by Railroad 10STCC 14413 Source: US Rail Desktop
  11. 11. Sand Mining Overcapacity: New Reality 11 » Growth in Wisconsin sand mining industry has slowed  60 mine/processing operations proposed June 2011 – June 2012  Four (4) proposed June 2012 – January 2013 » Transportation costs continue to concern WI and MN sand shippers » Established Illinois companies seeing significant upturns in volumes and financial returns » Industry consolidation continues
  12. 12. Processed Sand Total Delivered Cost Source: PLG analysis 12 » Benchmark cost with well-executed performance  Example unit train movement from Wisconsin to Texas with total delivered cost of approx. $180/ton  Logistics drives ~60% of total delivered sand cost » Potential for significant cost add- ons caused by strategic and tactical issues  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
  13. 13. Changes in Sand Logistics Model and Costs » Rail rate advantage for volume and unit train vs. manifest service  On a per-ton basis between Wisconsin and Texas, spreads are 17-29% » Western carriers are driving single line hauls and encouraging longer trains 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 (Barron), WI » Major sand providers establishing “in the play” transloading facilities to provide ready access to product  U.S. Silica - East Liverpool, OH  U.S. Silica – San Antonio, TX  Potential 2nd facility under consideration in San Antonio, TX » Post-boom market maturation 13Source: PLG analysis
  14. 14. 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  General optimism that demand from sand shippers may also strengthen 14
  15. 15. 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% – Propane ~28% – Normal Butane ~8% – Iso-Butane ~9% – Condensate ~13% » Crude Oil  Bakken play as a model  Surging Permian and Eagle Ford development 15
  16. 16. Shale Development Natural Gas Impacts » Industry a “victim of its own success”  Fracking results in oversupply; gas prices down 33% since 2010  Rigs leave Marcellus, other gas plays for oil plays  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 16
  17. 17. Source: EIA, Deloitte 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 » Adversely affecting coal industry, railroad coal loadings 17
  18. 18. 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 Carloads Quarterly Data Railcars Handled: Sand , Crude & Coal Sand Crude Coal STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop 18
  19. 19. Coal, Crude & Sand Trends: Carloads and Revenue Total Coal Cars Handled $0 $2 $4 $6 $8 $10 $12 $14 $16 $18 - 1 2 3 4 5 6 7 8 9 10 Billions Carloads Millions Carloads Revenue Total Crude & Sand Cars Handled 19 $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 - 100 200 300 400 500 600 700 800 900 Billions Thousands Sand Crude Revenue STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop
  20. 20. Shale Gas Driving Steel Manufacturing Comeback in US 20 » 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 vs. traditional blast furnace » 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 – Domestic steel industry capacity running at 74%  At least five new DRI steel plants being considered in the U.S. – now economical for the first time in 30 years due to low cost of natural gas  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  Voestalpine $700MM investment in Texas  Potential US Steel-Republic Steel JV to produce DRI  DRI-derived steel of higher quality than that created from recycled scrap, further driving demand
  21. 21. 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 » 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  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  Agrium – KY or MO » Rush of new plant announcements has sparked oversupply concerns, cancelations (Yara, Agrium) 21
  22. 22. Looking Ahead: Natural Gas » Oversupply conditions expected to persist through 2015 » 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)  Technology advancements for increased use of CNG as a transportation fuel 22
  23. 23. LNG Export Opportunity » Political/policy battle between domestic industrial users and producers » Sabine Pass, LA and Freeport, TX now permitted for exports  3.4 Bcf/day export capacity to come online by 2015  Represents ~5% of projected US dry gas production 23 Source: Waterborne Energy Inc. Data in $US/MMBtu Source: Congressional Research Service, EIA Selected US Natural Gas Import & Export Infrastructure » 20 additional terminal applications totaling 29 Bcf/day of export capacity pending before FERC
  24. 24. Shale Development NGL Impacts » Leading NGL and “wet gas” plays are Eagle Ford, Utica  Significant investment and expansion of gathering, fractionation, and takeaway capacity underway in the Utica Play  Takeaway capacity in Eagle Ford well exceeds current production (4x) » 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 24
  25. 25. Source: American Chemistry Council, May 2013 Shale Development Impact: Chemical Industry » Abundant ethane supplies have sparked chemical industry renaissance  Ethane is “cracked” to make ethylene, the most basic building block in the chemicals supply chain  Planned expansions will increase US ethylene capacity by 33% (11 MMmt)  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) 25Source: EIA  Domestic end-use of materials, i.e. plastics, will expand significantly  Up to 40% of new petrochemical output will be for export  New demand for plastic resin hoppers, specialty and pressure tank cars
  26. 26. 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 26
  27. 27. Looking Ahead: NGLs 27 Source: Canadian Energy Research Institute Source: Sunoco Logistics » 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  Demand expected to grow from 200 Mb/d to 500 Mb/d by 2020 » 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
  28. 28. Shale Development Crude Oil Impacts » Dramatic increases in US production due to fracking  7.35 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  North America should be crude oil independent by 2018 (total bbls produced) 28Source: Morgan Stanley, February 2013
  29. 29. 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  West African imports already down ~70% from 2010 levels » However, supply isn’t enough – “independence” also relies on lower domestic fuels consumption  CAFE standards the primary driver » Reducing imports means reducing waterborne crudes  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 29Source: BENTEK Energy
  30. 30. Bakken Oil Production and Logistics 30 » 2010-2011 discount of ~$8-12/bbl for Bakken crude vs. peer WTI  Undervalued due to logistics constraints “stranding” the oil » Early objective of crude-by-rail was to bridge gap until pipelines built, but has now become the primary transport mode for Bakken crude  ~70% rail market share  Pipelines operating below capacity; some project cancelations » Significant development of crude by rail loading terminals in 2011-2012  Takeaway capacity now exceeds production  Bakken vs. WTI differential near even (within ~$3) North Dakota Crude Oil Production ~793,000 BPD April 2013 First outbound unit train shipment December, 2009 Source: EIA, PLG Source: North Dakota Pipeline Authority, PLG Analysis
  31. 31. Crude Oil by Rail – North Dakota Terminals 31 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 (June 2013), PLG Analysis
  32. 32. North Dakota Class I Railroads and Crude Oil Terminals 32 Map by PLG Consulting
  33. 33. 33 All Crude Handled by Railroad Volume Growth STCC 13111 Source: US Rail Desktop
  34. 34. 34 Bakken Area Outbound Pipelines 3434 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 (Q2 2013, 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 TransCanada Bakken Marketlink * (4Q 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 1,075,000 *Project Still in the Review or Proposed Phase Year End System Capacity Source: North Dakota Pipeline Authority (June 2013)
  35. 35. 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 1,075,000 975,000 1,350,000 108,000 2,158,000 1,008,000 Source: North Dakota Pipeline Authority, PLG AnalysisBpd = Barrels per Day 35
  36. 36. Crude Oil Pipelines – Existing and Planned 36Source: CAPP Report, 2013 » 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
  37. 37. 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 DollarsPerBarrel Source: PLG analysis 37 » 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 Cost Comparison: Bakken to Cushing and USGC
  38. 38. 38 Logistics Challenges of Light/Sweet vs. Heavy/Sour Crudes » Not all crudes are created equal – light/sweet vs. heavy/sour  Brent, WTI, and US shale play crudes (Bakken, Permian, Niobrara, Permian) are light/sweet  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: Corpus Christi, Houston, Chicago, southern Illinois, California » 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 developments to coasts, US markets still 2+ years away  Dilbit via rail requires coiled, lined/insulated cars » US is close to saturation point on light/sweet crude at mid-continent and USGC refining areas 38 Source: CAPP, June 2013 Source: Turner Mason, RBN Energy US Crude Oil Production Growth by Grade
  39. 39. 39 Shale Development and Crude By Rail Impact on Market Dynamics » Price differentials driving trading and logistics patterns » Original objectives (2009-2010) of crude by rail to “bridge the gap” until pipelines built » By 2012, crude by rail viewed as a core mode of transportation and means of arbitrage  Differentials made rail attractive: Bakken and WTI trading at ~$10-$15/bbl. less than Brent; Alberta Bitumen trading at ~$30/bbl. less than Brent 39  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 – New multi-modal terminals/trading hubs at destination markets (i.e. Cushing, OK, St. James, LA, Pt. Arthur, TX, Albany, NY, Bakersfield, CA) – Lease and purchase of railcar fleets – Pipeline expansions, reversals, new construction  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) » Today: Spreads have narrowed, limiting arbitrage opportunities and slowing crude by rail volumes
  40. 40. Crude Transportation Costs June 2013 Oil Sands Bakken Gulf Coast Refiners East Coast Refiners Pacific NW Refiners Cushing, OK = Pipeline = Rail = Marine 40Sources: Various industry sources, pipeline tariffs, PLG analysis
  41. 41. $86 Bakken wellhead Gulf Coast Refiners East Coast Refiners Pacific NW Refiners $94 Cushing, OK = Pipeline = Rail $81 Oil Sands Light/Sweet at USGC Bakken (pipe): $96.50 Bakken (rail): $101 Brent (ship): $101.50 Heavy/Sour at USGC Mexican Maya (ship): $96 WCS (pipe): $99 WCS (rail): $104.50 Light/Sweet at LA Gulf Bakken (rail): $101 LLS (local): $103 LA Gulf Refiners Light/Sweet at East Coast Bakken (rail): $100.50 Brent (ship): $101 Light/Sweet at PNW Bakken (rail): $98.50 Brent (ship): $101 Crude Price Differentials By Source, Grade, and Destination – June 2013 $91 Bakken - Clearbrook Sources: EIA, Bloomberg, Platts, Baytex Energy, PLG analysis Dec. 2012 Spread Current Spread Change Brent - WTI $21.83/bbl $5.94/bbl -$15.89/bbl LLS - WTI $20/bbl $7.90/bbl -$12.10/bbl Mexican Maya - WCS $33.55/bbl $15.27/bbl -$18.28/bbl WTI - Bakken (Clearbrook) $3/bbl $3/bbl $0/bbl 41
  42. 42. 42 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 by rail fleet ~30,000 railcars, or 1-1.5 MM bbl./day equivalent  Short term demand is highly dependent on WTI – Brent spread » Railcar type is important  General service 31k gallon capacity cars can hold more crude than heavier coiled cars  Coiled cars can transport heavier crudes that need heat to offload – Some shippers prefer the general purpose (GP) rail cars because the larger capacity can be significant on their transportation cost for hauling lighter crudes – Some lessors prefer to have more coiled cars that have more uses than general service cars built to hedge themselves on an oversupply of general service tank cars if/when the crude by rail market declines » Key question: If/is/when will the crude tank car industry become overbuilt? 42
  43. 43. 0 500 1,000 1,500 2,000 2,500 3,000 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Thousandbbl/day Best-Case Crude by Rail Potential vs. Crude Railcar Capacity Other Production Sources Williston (Bakken) Oil Sands Crude Railcar Capacity Forecast of Crude Railcar Supply and Demand 43 » Production increases vs. railcar capacity increases  March crude fleet was ~30k cars and backlog was ~48.2k Backlog 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 productions » Under best-case scenario for rail market share capture, data suggests existing & planned tank car fleet exceeds demand Sources: CAPP, AAR, NDPA, GATX, and PLG analysis 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) 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 17 day turn
  44. 44. 44 Looking Ahead: North American Crude Oil Logistics » 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 – Bakken now sufficiently developed; next immediate areas for significant investment are Utica, Oil Sands, Permian, coastal areas and intermediate routes and facilities that support bitumen transport in particular » 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  Eventual government approval of crude oil exports on a limited basis, similar to LNG » Primary threats to crude by rail business 1. Narrow WTI-Brent spread 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 44 Key Drivers Supply Sources Oil Prices Destination Markets Capital Source: CME and Morningstar
  45. 45. Looking Ahead: Crude Oil Anticipated Production Growth and Product Flows 45 = Light/Sweet = Heavy/Sour = Pipeline = Marine = Rail = Storage terminal(s) = Refinery cluster – Light Sweet/Intermediate = Refinery cluster – Heavy Sour/Intermediate = Current b/d (000) = Future b/d (000) additional by 2017+420 123 Bakken +492 871 Oil Sands +605 1,985 Eagle Ford +800 800 Permian +480 1,200 Source: BENTEK Energy, CAPP, Railroad Commission of Texas, ND Pipeline Association, PLG Consulting
  46. 46. Thank You! For follow up questions and information, please contact: Taylor Robinson, President +1-508-982-1319 / Graham Brisben, CEO +1-708-386-0700 / Jean Arndt, Vice President +1-630-505-0273 / Jeff Dowdell, Senior Consultant +1-732-995-6696 / Gordon Heisler, Senior Consultant +1-215-620-4247 / Jeff Rasmussen, Senior Consultant +1-317-379-5715 / Jay Olberding, Analyst +1-636-399-5628 / This presentation is available at: WWW.PLGCONSULTING.COM Professional Logistics Group 46