1
Oil & Natural Gas:
The Evolving Freight
Transportation Impacts
Prepared for
	
  
July 30, 2013 Jackson Hole, WY
GE Capit...
2
»  Boutique consulting firm specializing in logistics, engineering,
and supply chain
§  Established in 2001
§  Over 10...
3
The Shale Development
Revolution – Big Picture
Disruptive
Technologies
•  Hydraulic Fracturing
•  Horizontal Drilling
Co...
4
Hydraulic Fracturing and
Horizontal Drilling
»  Rapid evolution of drilling technology
§  Fracking first used in 1947
§...
5
Representative Productivity Gains –
Fayetteville Shale Play
Source: Southwestern Energy investor presentation, June 2013
6
Shale Driving Growth in Natural
Gas and Crude Oil Production
Source: Baker Hughes 2013
GAS OIL THERMAL
Source: Baker Hug...
7
US Shale Plays
Gas:
Marcellus
Haynesville
Barnett
Oil:
Bakken
Eagle Ford
Permian Basin
Most Active Plays
Utica (NGLs)
Ni...
8
Shale Development Supply Chain
and Downstream Impacts
Feedstock (Ethane)
Byproduct (Condensate)
Home Heating (Propane)
O...
9
Hydraulic Fracturing Materials
Inputs and Logistics – Per Well
Materials
Chemicals
Clean Water/
Cement
Proppants
OCTG (P...
10
Correlation of Operating Rig Count
with Sand and Crude Shipments
STCC 14413 (sand) and 13111 (petroleum) Source: US Rai...
11
All Sand Handled by Railroad
STCC 14413 Source: US Rail Desktop
12
»  Wisconsin sand mining industry
§  72 operational frac sand mines
§  20 in development, 13 permitted, and 17
propos...
13
Processed Sand Total Delivered Cost
Source: PLG analysis
»  Benchmark cost with well-executed
performance
§  Example u...
14
Changes in Sand Logistics
Model and Costs
»  Rail rate advantage for volume and unit train vs. manifest
service
§  On ...
15
Sand Railcar Market Conditions
»  Conditions are normalizing
§  Builder backlog has been resolved
–  Wait time is now ...
16
Shale Play Product Flows Outbound
»  Natural Gas
§  Majority via pipelines, some trucks
»  Natural Gas Liquids (NGLs)
...
17
Shale Development Natural Gas Impacts
»  Industry a “victim of its own success”
§  Fracking results in oversupply; gas...
18
Source: EIA, Deloitte
Natural Gas Displacement of Coal for
Thermal Generation
»  Natural gas now supplying approx. 30% ...
19
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
...
20
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
2008 2009 201...
21
Shale Gas Driving Steel
Manufacturing Comeback in US
»  Shale gas boom makes direct-reduced iron steel
economical
§  N...
22
Shale Gas Development Impact
on Fertilizer Market
»  Natural gas is a feedstock for ammonia production
§  Represents ~...
23
Looking Ahead: Natural Gas
»  Oversupply conditions expected to persist through
2015
»  Factors that could revive deman...
24
LNG Export Opportunity
»  Political/policy battle between domestic industrial users and
producers
»  Sabine Pass, LA an...
25
Shale Development NGL Impacts
»  Leading NGL and “wet gas” plays are Eagle
Ford, Utica
§  Significant investment and e...
26
Source: American Chemistry Council, May 2013
Shale Development Impact:
Chemical Industry
»  Abundant ethane supplies ha...
27
Natural Gas & Petrochemical
Downstream Products
Feedstock/
Intermediary
Finished
Products
Natural Gas,
OIl
Ethane,
Naph...
28
Looking Ahead: NGLs
Source:	
  	
  Canadian	
  Energy	
  Research	
  Ins&tute	
  
Source:	
  	
  Sunoco	
  Logis&cs	
  ...
29
Shale Development Crude Oil Impacts
»  Dramatic increases in US production due to hydraulic fracturing and horizontal
d...
30
Driving Toward “Oil Independence?”
»  Decreasing dependency on foreign crude
§  Combination of US shale plus Canadian ...
31
Displacement of Waterborne Crudes
by Mid-Continent Sources
»  Reducing imports means reducing waterborne crudes
§  Wes...
32
Some Basic Facts About Crude Oil:
Grades and Qualities
»  Not all crudes are created equal
– light/sweet vs. heavy/sour...
33
Some Basic Facts About Crude Oil:
Major Production and Refining Areas
»  The special case of the Canada Oil Sands
§  H...
34
Crude Market Overview
Bakken
Oil
Sands
Permian
Eagle Ford
Hardisty, AB
Clearbrook, MN
Cushing, OK
St. James, LA
East Co...
35
Bakken Oil Production and
Logistics - History
»  2010-2011 discount of ~$8-12/bbl for Bakken
crude vs. peer WTI
§  Und...
36
Crude Oil by Rail – North
Dakota Terminals
North Dakota Crude Oil Rail Loading Capacity (Barrels Per Day)
Rail Terminal...
37
North Dakota Class I Railroads and
Crude Oil Terminals
Map by PLG Consulting
37
38
Bakken Area
Outbound Pipelines
38	
  
North Dakota Crude Oil Pipeline Capacity (Barrels Per Day)
Pipelines 2013 2014* 2...
39
Bakken Production vs. Total Takeaway
Capacity: 2013–2015 Projection
Year ND Production
Forecast (Bpd)
Pipeline
Capacity...
40
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
Pipeli...
41
All Crude Handled by Railroad
Volume Growth
STCC 13111 Source: US Rail Desktop
42
Source: CAPP Report, 2013
Crude Oil Pipelines:
Existing and Planned
»  Current pipelines ex.
Bakken operating below
cap...
4343	
  
Crude Tank Car
Market Conditions
»  Potential bottleneck: Railcars
§  Current order backlog runs to early 2015 (...
44
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 P...
45
45	
  
Shale Development and Crude By
Rail: Current Market Dynamics
»  Recent History:
§  Original (2009-2010) objecti...
46
Oil
Sands
Hardisty, AB
Heavy/Sour Crude Logistics and Price
Differentials – July 2013
$89
Heavy/Sour at TX GC
Mexican M...
47
Light/Sweet Crude Logistics and Price
Differentials – July 2013
Bakken
Permian
Eagle Ford
East Coast
Refiners
Pacific N...
48
48	
  
Looking Ahead:
North American Crude Oil Logistics
»  The gusher of new US light/sweet shale oil production made ...
49
Looking Ahead: Crude Oil Anticipated
Production Growth and Product Flows
Source: BENTEK Energy, CAPP, Railroad Commissi...
50
Thank You!
For follow up questions and information, please contact PLG:
+1-312-957-7757 / info@prologisticsgroup.com
Ta...
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Oil & Natural Gas. The Evolving Freight Transportation Impacts

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On July 30, 2013, CEO Graham Brisben presented at CIT’s Rail Resources Conference in Jackson Hole, Wyoming. Graham’s presentation, entitled “Oil & Natural Gas. The Evolving Freight Transportation Impacts,” 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 U.S.

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Oil & Natural Gas. The Evolving Freight Transportation Impacts

  1. 1. 1 Oil & Natural Gas: The Evolving Freight Transportation Impacts Prepared for   July 30, 2013 Jackson Hole, WY GE Capital Q3 All Employee Meeting Logis&cs   Engineering   Supply  Chain   CIT Rail Resources Conference
  2. 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
  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 3
  4. 4. 4 Hydraulic Fracturing and Horizontal Drilling »  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 §  Hydraulic fracturing/horizontal drilling yields 3-10x the initial production rate of conventional wells »  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
  5. 5. 5 Representative Productivity Gains – Fayetteville Shale Play Source: Southwestern Energy investor presentation, June 2013
  6. 6. 6 Shale Driving Growth in Natural Gas and Crude Oil Production Source: Baker Hughes 2013 GAS OIL THERMAL Source: Baker Hughes U.S. Crude Oil Production Source: EIA April 2013 7.35 MM bpd »  1,759 rigs in operation in USA as of June 21, 2013 »  Dramatic production growth §  700% increase in gas production since 2007; forecast to grow 9 Bcf/d from 2012-2018 §  Domestic oil production at 21 year high; forecast to reach 10MM bbl/d by 2018 »  IEA projects US to surpass Saudi Arabia in oil output, Russia in gas output by 2020
  7. 7. 7 US Shale Plays Gas: Marcellus Haynesville Barnett Oil: Bakken Eagle Ford Permian Basin Most Active Plays Utica (NGLs) Niobrara Mississippi Lime Emerging Plays
  8. 8. 8 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
  9. 9. 9 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
  10. 10. 10 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 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 2007 Avg. 2008 Avg. 2009 2010 2011 2012 2013 OperatingOnshoreRigs Carloads Operating On Shore Rigs All Sand Carloads Petroleum Carloads
  11. 11. 11 All Sand Handled by Railroad STCC 14413 Source: US Rail Desktop
  12. 12. 12 »  Wisconsin sand mining industry §  72 operational frac sand mines §  20 in development, 13 permitted, and 17 proposed §  New applications are still coming in for new mines »  Minnesota silica sand mining §  17 active frac sand mining facilities §  Over 20 facilities in the planning stages »  Large barriers to entry §  1 - 3 years to find, permit, and start §  Transportation key to success »  Industry consolidation continues §  Focus on integrated supply chain (US Silica) Sand Mining Frac Sand Industry Across Wisconsin, May 1, 2013 Source: WisconsinWatch.org Source: MPR News Minnesota Frac Sand Mining, May 1, 2013 12 Source: WisconsinWatch.org, MPR News, May 2013
  13. 13. 13 Processed Sand Total Delivered Cost Source: PLG analysis »  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
  14. 14. 14 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 Source: PLG analysis
  15. 15. 15 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
  16. 16. 16 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
  17. 17. 17 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 17 Source: RBN, PLG analysis Source: RBN
  18. 18. 18 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 §  Eastern US transition through 2018: 18GW coal retirements vs. 26GW of new natural gas plants under development »  Adversely affecting coal industry, railroad coal loadings 18Source: RBN Energy, June 2013 Fuel Cost Comparison for Electricity Generation Source: Bentek, PLG analysis
  19. 19. 19 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 Sand Crude Coal STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop Railcars Handled: Sand, Crude, & Coal
  20. 20. 20 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 2008 2009 2010 2011 2012 Billions Millions Carloads Revenue $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 - 100 200 300 400 500 600 700 800 900 2008 2009 2010 2011 2012 Billions Thousands 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
  21. 21. 21 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 §  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 13% since Jan. 2008 –  Compare to 20% growth in steel production internationally §  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 »  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 (Oilprice.com) §  Joint venture between Nucor Corp. and Encana Corp. commits $3 billion to development of new gas wells to support DRI plants §  Voestalpine $740MM 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 Source: World Steel Association
  22. 22. 22 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 §  Northern Plains Nitrogen – Grand Forks, ND §  CF Industries – expansions at Donaldsonville, LA and Port Neal, IA §  PotashCorp - resumption of ammonia production at Geismar, LA §  Agrium – KY or MO §  EuroChem – Iberville Parish / St. John the Baptist Parish, LA »  Rush of new plant announcements sparked oversupply concerns, cancelations (Yara, Agrium)
  23. 23. 23 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
  24. 24. 24 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 »  20 additional terminal applications totaling 29 Bcf/day of export capacity pending before FERC Source: Waterborne Energy Inc. Data in $US/MMBtu Source: Congressional Research Service, EIA Selected US Natural Gas Import & Export Infrastructure
  25. 25. 25 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
  26. 26. 26 Source: American Chemistry Council, May 2013 Shale Development Impact: Chemical Industry »  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 §  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) Source: 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
  27. 27. 27 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
  28. 28. 28 Looking Ahead: NGLs Source:    Canadian  Energy  Research  Ins&tute   Source:    Sunoco  Logis&cs   »  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
  29. 29. 29 Shale Development Crude Oil Impacts »  Dramatic increases in US production due to hydraulic fracturing and horizontal drilling §  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 Source: Morgan Stanley, February 2013
  30. 30. 30 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
  31. 31. 31 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: BENTEK Energy
  32. 32. 32 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
  33. 33. 33 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 developments to coasts, US markets still 2+ years away §  Railbit/dilbit via rail requires coiled, lined/insulated cars »  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
  34. 34. 34 Crude Market Overview Bakken Oil Sands Permian Eagle Ford Hardisty, AB Clearbrook, MN Cushing, OK St. James, LA East Coast Refiners Pacific Northwest Refiners California Refiners TX Gulf Coast Refiners LA Gulf Coast 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 Brent Mexican Maya Venezuela Crude West African ANS Source: EIA, Google, PLG Consulting
  35. 35. 35 Bakken Oil Production and Logistics - History »  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) §  Rail captures majority market share Source: North Dakota Pipeline Authority, PLG Analysis Source: EIA, North Dakota Pipeline Authority, PLG ~810,000 BPD May 2013 First outbound unit train shipment December, 2009
  36. 36. 36 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 (June 2013), PLG Analysis
  37. 37. 37 North Dakota Class I Railroads and Crude Oil Terminals Map by PLG Consulting 37
  38. 38. 38 Bakken Area Outbound Pipelines 38   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)
  39. 39. 39 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  
  40. 40. 40 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 »  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
  41. 41. 41 All Crude Handled by Railroad Volume Growth STCC 13111 Source: US Rail Desktop
  42. 42. 42 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
  43. 43. 4343   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?
  44. 44. 44 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 »  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 •  Other production sources at constant 165 kbpd
  45. 45. 45 45   Shale Development and Crude By Rail: Current Market Dynamics »  Recent History: §  Original (2009-2010) objective 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 –  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 –  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 growth §  Price differentials driving trading and logistics patterns 45 Key Drivers Supply Sources Oil Prices Destination Markets Capital
  46. 46. 46 Oil Sands Hardisty, AB Heavy/Sour Crude Logistics and Price Differentials – July 2013 $89 Heavy/Sour at TX GC Mexican Maya (ship): $98 WCS (pipe): $107 WCS (rail): $113 Spread Dec. 2012 July 2013 Change Mexican Maya - WCS $33.55/bbl $8.90/bbl -$24.65/bbl Crude Prices from July 2013 Sources: EIA, CME Group, Platts, Google, PLG analysis 46 TX Gulf Coast Refiners Pacific Northwest Refiners California Refiners PADD III Demand 7,650 kbpd PADD V Demand 2,400 kbpd Light/Sweet Heavy/Sour Light/Sweet Heavy/SourMexican Maya Marine Rail Pipeline Clearbrook, MN Chicago, IL
  47. 47. 47 Light/Sweet Crude Logistics and Price Differentials – July 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): $107 Brent (ship): $108 WTI (pipe): $111 Light/Sweet at PNW Bakken (rail): $109 Brent (ship): $108 Light/Sweet at EC Bakken (rail): $111 Brent (ship): $108 Light/Sweet at LA GC Bakken (rail): $111 LLS (local): $110 Spread Dec. 2012 July 2013 Change Brent - WTI $21.83/bbl $2.82/bbl -$19.01/bbl LLS - WTI $20.00/bbl $4.90/bbl -$15.10/bbl WTI - Bakken (Clearbrook) $3.00/bbl $2.54/bbl -$0.46/bbl Brent ANS Brent 47 Crude Prices from July 2013 Sources: EIA, Bloomberg, Platts, Baytex Energy, Google, CME Group, PLG analysis 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 Chicago, IL Clearbrook, MN Cushing, OK St. James, LA $96 (wellhead) WTI:$105
  48. 48. 48 48   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 §  Significant oversupply of light/sweet and super-light grades »  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 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
  49. 49. 49 Looking Ahead: Crude Oil Anticipated Production Growth and Product Flows Source: BENTEK Energy, CAPP, Railroad Commission of Texas, ND Pipeline Association, Google, PLG Consulting = Current 2013 = Future 2017 Anticipated Production Growth Permian1,680 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
  50. 50. 50 Thank You! For follow up questions and information, please contact PLG: +1-312-957-7757 / info@prologisticsgroup.com 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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