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1Logistics Engineering Supply ChainStifel NicolausCapital MarketsConference CallMay 24, 2013 | 11:00 AMDial In Numbers(888...
2Crude by RailUpdateGraham BrisbenCEOTaylor RobinsonPresidentShale Gas – Driverof ReshoringIntroductionStifel Nicolaus Cap...
3About PLG Consulting» Boutique consulting firm with team members throughout the US Established in 2001 Over 80 clients ...
4Shale Gas – Driver for ReshoringA detailed analysis of shale’s direct impact to the renaissance of US manufacturing Real...
5Today’s Reshoring DiscussionWhat is reshoring?The return of manufacturing that has been moved offshore tothe original man...
6The Shale Development RevolutionDisruptiveTechnologies-Hydraulic Fracturing-Horizontal DrillingContinuousEvolution-Consta...
7Two Technology Breakthroughs Together:Hydraulic Fracturing & Horizontal DrillingGreat YouTube Video by Marathon on Fracki...
8US Shale PlaysGas:MarcellusHaynesvilleBarnettOil:BakkenEagle FordPermian BasinMost Active PlaysUticaEaglebineMississippi ...
9Shale Oil & Gas:High Level Supply ChainNaturalGas• Proppants• Clean water• ChemicalsMaterials• Drilling Rigs• OCTG (Pipe)...
10Downstream Supply ChainConsumersPetrochemicalsAromatics AmmoniaManyOthersOlefinsEthylene Propylene ButylenePolymersPolyb...
11Natural Gas & PetrochemicalDownstream ProductsFeedstock/IntermediaryFinishedProductsNatural Gas,OIlEthane,Naphtha, etc.E...
12Shale Gas Is More ImportantTo US Industry Competitiveness Than Oil» Natural gas is 4X cheaper than oil on aBTU-basis In...
13Natural Gas Displacement of Coalfor Thermal Generation» Natural gas now supplying ~30% of thermalfuel demand (~13% share...
14US Electricity Cost Competitiveness IsAiding Energy-Intensive Industries Now» Shale gas boom makes electricity costs low...
15US Steel Cost Advantagevs. China Is Widening
16US Energy Cost Advantage Is Nota Short Term PhenomenaOver 1,000 gas wells in the Marcellus (PA) have been drilled and ca...
17Low Cost Ethylene Is Key Input to ManyDownstream Gas By Products» Gas feedstock (ethane) makes ethylenevery competitive...
18Fertilizer Industry Reshoring Example» Natural gas is a feedstock for ammonia production» Cheap U.S. natural gas means b...
19Low Cost Gas Feedstock ProvidesTremendous Cost Advantages for Resins» Europe and Asia are tied to naptha as afeedstock f...
20Raw Material Cost Advantage Is Key CostDriver to Reshoring Future» Direct Materials normally accounts for 60-70% ofmanuf...
21US Is Already Among the Most CostCompetitive Manufacturing Locations» US competitiveness driven by continuousproductivit...
22Where and When Will Reshoring Occur?Or not occur?Where?Southeast US formore material-dependent costproductsMexico for hi...
23Further US Industry ExpansionOpportunities Through Export» LNG export grabs the headlines Sabine Pass, LA and Freeport,...
24Big Picture View on ReshoringHeadwindsTailwinds» China & other low cost laborlocations have substantial laborcost advant...
25Implications and Wrap Up» Shale gas is a game-changer for many US manufacturingindustries due to impact on material cost...
26Thank You!For follow up questions and information, please contact:Taylor Robinson, President+1 (508) 982-1319 / trobinso...
27Crude by Rail UpdateA detailed look at the impacts of crude by rail on the marketplace Real World Experience Depth of ...
28Shale Development Crude Oil Impacts» Dramatic increases in US production due to fracking 7.2 MM bbl/day Projected to g...
29Driving Toward “Oil Independence?”» Decreasing dependency on foreign crude Combination of US shale plus Canadian oil sa...
30Bakken Oil Production and LogisticsNorth Dakota Crude Oil ProductionFirst outbound unittrain shipmentDecember, 2009~779,...
31Crude Oil by RailNorth Dakota TerminalsSource: North Dakota Pipeline Authority (April 2013), PLG AnalysisNorth Dakota Cr...
32North Dakota Class I Railroadsand Crude Oil TerminalsMap by PLG Consulting
33All Crude Handled byRailroad Volume GrowthSTCC 13111 Source: US Rail Desktop
34Bakken Area Outbound PipelinesNorth Dakota Crude Oil Pipeline Capacity (Barrels Per Day)Pipelines 2013 2014* 2015*Butte ...
35Bakken Production vs. Total TakeawayCapacity: 2013–2015 ProjectionYear ND ProductionForecast (Bpd)PipelineCapacityRail T...
36Crude Oil PipelinesExisting and PlannedSource: CAPP Report, 2012» Current pipelines ex. Bakkenoperating below capacity» ...
37Crude 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$16.00Pipeline toCushingRai...
38Shale Development Impact onCrude Oil Market Dynamics» Price differentials driving trading and logisticspatterns Bakken ...
39Logistics Challenges of Light/Sweetvs. Heavy/Sour Crudes» Not all crudes are created equal – light/sweet vs. heavy/sour...
40Looking Ahead:North American Crude Oil» The gusher of new US light/sweet shale oil production madepossible by fracking h...
41Looking Ahead: Crude Oil AnticipatedProduction Growth and Product Flows= Light/Sweet= Heavy/Sour= Pipeline= Marine= Rail...
42Thank You!For follow up questions and information, please contact:Graham Brisben, CEO+1 (708) 386-0700 / gbrisben@prolog...
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PLG Provides Industry Update to Stifel Nicolaus Investors

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On May 24, 2013, PLG CEO Graham Brisben and President Taylor Robinson presented to industry investors and analysts via teleconference sponsored by Stifel Nicolaus Capital Markets. Graham’s presentation was entitled “Crude by Rail Update.” Taylor’s presentation was entitled “Shale Gas – Driver of Reshoring.” The presentations addressed the current crude-by-rail market in the US, as well as industry trends leading to a renewed reshoring focus for US manufacturers.

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  1. 1. 1Logistics Engineering Supply ChainStifel NicolausCapital MarketsConference CallMay 24, 2013 | 11:00 AMDial In Numbers(888) 267-2848 (Domestic)(973) 413-6103 (International)Passcode: 987415
  2. 2. 2Crude by RailUpdateGraham BrisbenCEOTaylor RobinsonPresidentShale Gas – Driverof ReshoringIntroductionStifel Nicolaus Capital MarketsConference CallDate: Friday, May 24, 2013Time: 11:00 AM ESTLength: 60 minutesHostMichael Baudendistel, CFA,Transportation AnalystDial In Numbers(888) 267-2848 (Domestic)(973) 413-6103 (International)Passcode: 987415Replay(800) 332-6854 (Domestic)(973) 528-0005 (International)Passcode: 987415
  3. 3. 3About PLG Consulting» Boutique consulting firm with team members throughout the US Established in 2001 Over 80 clients and 200 engagements Significant shale development practice since 2010» Practice Areas Logistics Engineering Supply Chain» Consulting services Strategy & optimization Assessments & best practice benchmarking Logistics assets & infrastructure development Supply Chain design & operationalization M&A/investments/private equity» Specializing in these industry categories: Energy Bulk commodities Manufactured goods Private EquityPartial Client List
  4. 4. 4Shale Gas – Driver for ReshoringA detailed analysis of shale’s direct impact to the renaissance of US manufacturing Real World Experience Strategic Perspective Depth of Analysis Hands-on EngagementPresented by Taylor RobinsonMay 24, 2013PLGConsulting.comLogistics Engineering Supply Chain4
  5. 5. 5Today’s Reshoring DiscussionWhat is reshoring?The return of manufacturing that has been moved offshore tothe original manufacturing location, mainly the U.S.Why is this relevant? What has changed/will change?Conditions have changed over the past few years that now favorreshoring production including quality concerns, lower energyand raw material costs in the U.S., and rising foreign labor costs.What are the largest cost drivers in manufacturing products?Materials, Labor, Overhead, Transportation, and Energy.Has it started yet?New factory announcements in the chemical, resin, fertilizer,and steel industries have been made in the past year. Limitednumbers of traditional manufacturing companies have movedtheir operations back to the states.When will it hit?PLG believes that the trend will grow substantially over the nextseveral years for a number of reasons. Let’s discuss!* MIT Forum for Supply Chain Innovation Survey;340 participants completed the survey; 2013 Jan1234515%definitelyconsidering2013 MIT Survey*of ManufacturersConsidering Reshoring34%considering5
  6. 6. 6The Shale Development RevolutionDisruptiveTechnologies-Hydraulic Fracturing-Horizontal DrillingContinuousEvolution-Constant Change-Rapid Change-Difficult to predictMarketingDynamics-Supply & Demand-Customers-Price-Logistics6
  7. 7. 7Two Technology Breakthroughs Together:Hydraulic Fracturing & Horizontal DrillingGreat YouTube Video by Marathon on Frackinghttp://www.youtube.com/watch?v=VY34PQUiwOQ7
  8. 8. 8US Shale PlaysGas:MarcellusHaynesvilleBarnettOil:BakkenEagle FordPermian BasinMost Active PlaysUticaEaglebineMississippi LimeEmerging Plays
  9. 9. 9Shale Oil & Gas:High Level Supply ChainNaturalGas• Proppants• Clean water• ChemicalsMaterials• Drilling Rigs• OCTG (Pipe)• CementEquipmentUpstreamExplorationProduction(Well Site)Midstream DownstreamRefiningFuelGasoline DistillatesCrudeOilCrude/GasMixtureChemicalFeedstocksProcessProductLogistics FlowTransportationProcessingGatheringJet Fuel Residuals
  10. 10. 10Downstream Supply ChainConsumersPetrochemicalsAromatics AmmoniaManyOthersOlefinsEthylene Propylene ButylenePolymersPolybutadiene Polypropylene PolyethyleneManufacturingIntermediates becomeconsumer andindustrial productsNaturalGas PowerGenerationIndustrialUseConsumerUsePetrochemicalProcessingProcessProductLogistics FlowRefinedCrudeProductsChemicalFeedstocks• Naptha• Ethane• Propane• Butane• Iso-butaneWetgasDrygas
  11. 11. 11Natural Gas & PetrochemicalDownstream ProductsFeedstock/IntermediaryFinishedProductsNatural Gas,OIlEthane,Naphtha, etc.EthyleneMiscellaneousVinyl AcetateLinearAlcoholsEthylBenzeneEthyleneOxideEthyleneDichlorideHigh DensityPolyethyleneLow-DensityPolyethyleneAdhesives, coatings, textile/paper. finishing, flooringDetergentsStyreneEthyleneGlycolVinyl ChlorideHouse wares, crates,drums, food containers,bottles.Food packaging, film,trash bags, diapers, toysPVCAntifreezeFibersPETMiscellaneousPolystyreneSANSBRLatexMiscellaneousMedical gloves,carpeting,coatingsTire, hoseInstrument lenses,house waresInsulation, cupsSiding, windows,frames, pipe, medicaltubingPantyhose,carpets, clothingBottles, film
  12. 12. 12Shale Gas Is More ImportantTo US Industry Competitiveness Than Oil» Natural gas is 4X cheaper than oil on aBTU-basis Innovation will move more transportation fuels tonatural gas Natural gas is a cleaner burning fuel» Gas drives an increasing share of theUS electricity generation capacity andhas made the US the factory energy costleaders» Gas’ downstream by-products haveworld class competitiveness in the USand are the “building blocks ofmanufacturing” Chemicals Resins Compounds$0$5$10$15$20$25$302005 2006 2007 2008 2009 2010 2011 2012 2013Oil vs. Gas Price on BTU BasisWTI Crude ($/MMBTU)Natural Gas ($/MMBTU)Source: EIA
  13. 13. 13Natural Gas Displacement of Coalfor Thermal Generation» Natural gas now supplying ~30% of thermalfuel demand (~13% share capture from coal)» Despite recent increases in prices, natural gasshare capture expected to maintain or grow Environmental regulations of coal burning Scheduled coal unit retirements» Will continue to adversely affecting coalindustry0500,0001,000,0001,500,0002,000,0002,500,000Nuclear Natural Gas CoalGWh20072012Source: EIANet Generation by Source
  14. 14. 14US Electricity Cost Competitiveness IsAiding Energy-Intensive Industries Now» Shale gas boom makes electricity costs lowerfor US industries Reduced energy costs felt throughout supply chain Large users are achieving even lower costs by buying naturalgas directly from wells with long term contracts Some processes only become economically viable with lowercosts» Steel example -- Direct Reduction Iron (DRI) Shale gas strips oxygen from iron core to make high puritypellets Produces higher quality steel vs. scrap steel DRI pellets cost ~$270/ton vs. scrap steel cost ~$390/ton At least five new DRI steel plants being considered in theU.S. by: Nucor/Encana, Bluescope Steel/Cargill, EssarGlobal Ltd.– Nucor signed a 20 year supply agreement with EncanaGas & Oil to lock in energy costs» Reciprocal Growth and Other Industry Impacts Shale gas creates demand for OCTG steel pipe for wells Increased demand for U.S. steel creates greater demand forU.S. gas Other energy-intensive industries will have great advantagesand are anticipating further expansions in the US– Chemicals– Glass– CastingsAverage Cost of Electricity (2012)Three iron-ore storage domes stand near Nucors direct-reduced iron plant in Convent,La.www.wsj.com - Feb 1, 201331¢ 30¢18¢13¢9¢7¢4¢ 3¢05101520253035¢/kWhAAverage Cost of Electricity (2012)
  15. 15. 15US Steel Cost Advantagevs. China Is Widening
  16. 16. 16US Energy Cost Advantage Is Nota Short Term PhenomenaOver 1,000 gas wells in the Marcellus (PA) have been drilled and cappeddue to gas pricing, lack of processing capacity and gas over-supply….INSIGHT
  17. 17. 17Low Cost Ethylene Is Key Input to ManyDownstream Gas By Products» Gas feedstock (ethane) makes ethylenevery competitive Ethylene is feedstock for a broad range of chemicalproducts – a “building block” of manufacturing US is now low cost producer of ethylene – up to60% cost advantage >70 cents per pound more profit per pound fromethane production compared to naphtha Ethane-to-Naphtha cracker ratio in the US– Was 70%/30%– Likely to reach 95%/5%» Production capacity for ethylene set toexpand in U.S. -- abundant supply Investment in ethylene production has alreadyincreased by 33% domestically Production capacity expected to rise by up to 35%in coming years Investments in the repair and expansion of existingcrackers also increasing – part of the $95Bpetrochemical expansions in coming 5 years Ethane exports will grow fueling more demand forgasRelative Profit Margins for Producing Ethylene from Ethane and Naphtha
  18. 18. 18Fertilizer Industry Reshoring Example» Natural gas is a feedstock for ammonia production» Cheap U.S. natural gas means billions in investment fornew domestic fertilizer plants, displacing ~11 MM m/t ofimports. Plant announcements include: Orascom/Iowa Fertilizer Company - Wever, IA CHS - Spiritwood, ND Ohio Valley Resources - Spencer County, IN Yara - Belle Plaine, SK Canada North Dakota Grain Growers Association - Williston Basin, ND CF Industries – expansions at Donaldsonville, LA and Port Neal, IA PotashCorp - resumption of ammonia production at Geismar, LA Agrium – KY or MO (anticipated)» If new plant construction/expansions are completed,imports of nitrogen-based fertilizers could be reducedfrom ~50% to “near zero” by 2018» Lower gas prices directly benefit American farmers Increased demand for corn, soybeans has driven fertilizer costs higher Excess natural gas supply can be utilized to produce greater volumes ofnitrogen-based fertilizer more economically
  19. 19. 19Low Cost Gas Feedstock ProvidesTremendous Cost Advantages for Resins» Europe and Asia are tied to naptha as afeedstock for their downstream processing,giving the US a large structural costadvantage for the foreseeable future» Plastics will continue their cannibalization ofmetals and composites because of cost andweight advantage Continued conversion seen in the automotive industry Will transition more consumer and other industrialproducts» A number of large resin facilities on thedrawing board New plant/expansion announcements forthcoming 40%+ of new production will be exported» Plastics and rubber products among the firstto be reshored05001000150020002500Asia USHistoricalSaudi US Recent$/TonHDPE Calculated Cost$2,018$1,266$692Sources: CMAI, TopLine Analytics, and Alembic analysis, 2012$526
  20. 20. 20Raw Material Cost Advantage Is Key CostDriver to Reshoring Future» Direct Materials normally accounts for 60-70% ofmanufacturing cost of goods sold (COGS) Most product cost competition is won or lost here Shale gas giving the US an advantage for metals, plastics,chemicals» Labor cost is usually ~20% of COGS for USmanufacturers China labor cost in $ will continue to rise due to inflation andcurrency appreciation US labor rate expected to remain stable» Transportation & Logistics costs are in “Other” Asia/China has 5~10% cost disadvantage due to shippingproducts on a boat for ~1 month (major cash flow disadvantage) Transportation costs continue to rise» Energy cost is usually less than 5% for finalmanufacturer However, energy costs are buried in raw material costs andtransportation and can be more substantial in energy-intensiveproducts
  21. 21. 21US Is Already Among the Most CostCompetitive Manufacturing Locations» US competitiveness driven by continuousproductivity improvements over past 25years Many US manufacturers have adopted Lean and SixSigma techniques Global competition has driven other cost cuttinginnovation – Value Engineering, materials» Experts are predicting that US will closethe overall cost gap with China over thenext several years» Other advantages of domestic supply chain Reduce risk due to disaster, quality, shipping delays, IP issues Reduced lead time and inventory -- improved cash flow! Responsiveness to customer demand Production is closer to R&D
  22. 22. 22Where and When Will Reshoring Occur?Or not occur?Where?Southeast US formore material-dependent costproductsMexico for high laborcontent productsWhen? Likely an ongoing evolutionaryprocess for the next 5 years Metals, Chemicals, Plasticproducts are first movers Other lower labor contentproducts will follow likeappliances, transportationequipment, furniture,machineryWhat productswill likely neverreshore? Shoes and apparel Fabric and textiles Computer and electronicproducts1 23
  23. 23. 23Further US Industry ExpansionOpportunities Through Export» LNG export grabs the headlines Sabine Pass, LA and Freeport, TX now permitted forexports; more terminals in application phase– 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 ofexport capacity pending before FERC Expect only moderate volumes of LNG exports to beapproved vs. abundant supply potential– Avoids exposure of natural gas to similar marketforces that have affected oil– Useful foreign policy instrument for ExecutiveBranch» Ethylene and resins have large exportopportunities to both Europe and Asia» Steel and other metals have potential togrow exports» Traditional manufactured goods willlikely grow exports as production ismoved back to statesSource: Waterborne Energy Inc. Data in $US/MMBtuPhoto: Wall Street Journal
  24. 24. 24Big Picture View on ReshoringHeadwindsTailwinds» China & other low cost laborlocations have substantial laborcost advantage vs. US» Some supply chains only exist inAsia – electronics, apparel, etc» China business owners will fighthard to keep manufacturing work» Chinese government will continueto subsidize certain industries» U.S. shale gas impacts on: Energy costs Raw material costs By product costs» China’s rising costs Labor rates Currency valuation Structural ties to oil» Other advantages of domesticmanufacturing Improved cash flow due to less inventory Reduced risk and improvedresponsiveness Proximity to market and R&D
  25. 25. 25Implications and Wrap Up» Shale gas is a game-changer for many US manufacturingindustries due to impact on material costs» US manufacturing must continuously reducetheir labor and overhead costs» Continuous evolution…. The Chinese will not easily give up on manufacturing US products New entrants in US will use new materials and technology in manyindustries Innovate or perish» Shale oil and gas has additive benefits to the USeconomy Energy independence – 2020 or 2025? Driving large increase in exports – LNG, propane, petrochemicals,chemicals, plastics Improvement in trade deficit Shale oil and gas supply chain will drive job growth
  26. 26. 26Thank You!For follow up questions and information, please contact:Taylor Robinson, President+1 (508) 982-1319 / trobinson@prologisticsgroup.com
  27. 27. 27Crude by Rail UpdateA detailed look at the impacts of crude by rail on the marketplace Real World Experience Depth of Analysis Strategic Perspective Hands-on EngagementLogistics Engineering Supply ChainPresented by Graham BrisbenMay 24, 2013PLGConsulting.com27
  28. 28. 28Shale Development Crude Oil Impacts» Dramatic increases in US production due to fracking 7.2 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 upwardSource: Morgan Stanley, February 2013Source: Morgan Stanley, February 2013
  29. 29. 29Driving Toward “Oil Independence?”» Decreasing dependency on foreign crude Combination of US shale plus Canadian oil sands estimated to reduceimports to <15% by 2020 West African imports already down ~70% from 2010 levels» However, supply isn’t enough – “independence” alsorelies 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 criticalto the total crude market Bakken as case study for large crude by rail operationsSource: BENTEK Energy
  30. 30. 30Bakken Oil Production and LogisticsNorth Dakota Crude Oil ProductionFirst outbound unittrain shipmentDecember, 2009~779,000 BPD February 2013Source: EIA, PLG» 2010-2011 discount of ~$8-12/bbl for Bakkencrude vs. peer WTI Undervalued due to logistics constraints “stranding” the oil» Early objective of crude-by-rail was to bridgegap until pipelines built, but has now becomethe primary transport mode for Bakken crude ~70% rail market share Pipelines operating below capacity; some projectcancelations» Significant development of crude by railloading terminals in 2011-2012 Takeaway capacity now exceeds production Bakken vs. WTI differential near even (within ~$5)Source: North Dakota Pipeline Authority, PLG Analysis
  31. 31. 31Crude Oil by RailNorth Dakota TerminalsSource: North Dakota Pipeline Authority (April 2013), PLG AnalysisNorth Dakota Crude Oil Rail Loading Capacity (Barrels Per Day)Rail Terminals 2013 2014* 2015* Rail CarrierEOG Rail, Stanley, ND (Up to 90,000 BOPD) 65,000 65,000 65,000 BNSFInergy COLT Hub, Epping, ND (Q2 2012) 120,000 120,000 120,000 BNSFHess Rail, Tioga, ND (Up to 120,000 BOPD) 60,000 60,000 60,000 BNSFBakken Oil Express, Dickinson, ND 100,000 100,000 100,000 BNSFSavage Services, Trenton, ND (Q2 2012 Unit Trains) 90,000 90,000 90,000 BNSFEnbridge, Berthold, ND (Q4 2012) 80,000 80,000 80,000 BNSFGreat Northern Midstream, Fryburg, ND (Q1 2013) 60,000 60,000 60,000 BNSFMusket, Dore, ND (Q2 2012) 60,000 60,000 60,000 BNSFPlains, Ross, ND 65,000 65,000 65,000 BNSFGlobal/Basin Transload, Zap, ND (Estimate Not Confirmed) 40,000 40,000 40,000 BNSFPlains All American, Manitou, ND 65,000 65,000 65,000 BNSFBNSF Total Capacity 805,000 805,000 805,000Plains - Van Hook, New Town, ND 65,000 65,000 65,000 CPDakota Plains, New Town, ND 30,000 80,000 80,000 CPGlobal Partners, Stampede, ND 60,000 60,000 60,000 CPCP Total 155,000 205,000 205,000Various Sites in Minot, Dore, Donnybrook, Gascoyne, and Stampede 30,000 30,000 30,000Total Crude Oil Rail Loading Capacity 990,000 1,040,000 1,040,000*Project still in the review or proposed phase Year End System Capacity
  32. 32. 32North Dakota Class I Railroadsand Crude Oil TerminalsMap by PLG Consulting
  33. 33. 33All Crude Handled byRailroad Volume GrowthSTCC 13111 Source: US Rail Desktop
  34. 34. 34Bakken Area Outbound PipelinesNorth Dakota Crude Oil Pipeline Capacity (Barrels Per Day)Pipelines 2013 2014* 2015*Butte Pipeline 160,000 160,000 160,000Butte Loop* (Late 2014) - 110,000 110,000Enbridge Mainline North Dakota 210,000 210,000 210,000Enbridge Bakken Expansion Program (Q1-11/Q1-13) 145,000 145,000 145,000Plains Bakken North (Q2 2013, Up to 75,000 BOPD) 50,000 50,000 50,000High Prairie Pipeline* - 150,000 150,000Enbridge Sandpiper* (Q1 2016) - - -TransCanada Keystone XL* (2015) - - 100,000TransCanada Bakken Marketlink * (4Q 2015) - - 100,000Hiland Partners Double H Pipeline (Q3 2014, Up to 100,000 BOPD) 50,000 50,000Pipeline Total 565,000 875,000 1,075,000*Project Still in the Review or Proposed Phase Year End System CapacitySource: North Dakota Pipeline Authority (April 2013)
  35. 35. 35Bakken Production vs. Total TakeawayCapacity: 2013–2015 ProjectionYear ND ProductionForecast (Bpd)PipelineCapacityRail TerminalCapacityRail CarrierCapacityND RefineryConsumptionTotalOutbound &RefineryCapacityExcess LogisticsCapacity2013 850,000 565,000 990,000 1,300,000 68,000 1,623,000 773,0002014 980,000 875,000 1,040,000 1,300,000 68,000 1,983,000 1,003,0002015 1,150,000 1,075,000 1,040,000 1,350,000 90,000 2,205,000 1,055,000Source: North Dakota Pipeline Authority, PLG AnalysisBpd = Barrels per Day
  36. 36. 36Crude Oil PipelinesExisting and PlannedSource: CAPP Report, 2012» Current pipelines ex. Bakkenoperating below capacity» Fixed routes and long lead times arechallenged by new dynamic NA oilmarket 10 year commitments required for new buildpipeline projects» Pegasus spill raising new concernsabout Keystone XL Special challenges of Dilbit Pegasus the only pipeline currently handlingCanadian oil sands bitumen to US GulfCoast» Several natural gas pipelineconversions planned Trunkline (ETP) – Patoka, IL-St. James, LA Freedom (KM) – Permian Basin-SouthernCalifornia Energy East (TransCanada) – Hardisty, AB-St. Johns, NB
  37. 37. 37Crude 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$16.00Pipeline toCushingRail to Cushing Pipeline to PtArthurRail to PtArthurDollarsPerBarrelSource: PLG analysis» Rail cost: 50-100% more expensive thanpipeline transport» Near-term offsetting rail advantages: Site permitting, construction much faster Lower capital cost Scalable Shorter contracts (2-3 year commitments vs. 10 years forpipeline) Faster transit times Access to coastal areas not connected via pipeline Origin/destination flexibility Primary advantage: Tool of arbitrage for trading desksCost Comparison: Bakken to Cushing and USGC
  38. 38. 38Shale Development Impact onCrude Oil Market Dynamics» Price differentials driving trading and logisticspatterns Bakken and WTI trading at ~$10-$15/bbl less than Brent; AlbertaBitumen trading at ~$30/bbl less than Brent E&P, midstream players willing to rapidly deploy significantcapital to enable access– Multi-modal logistics hubs in shale plays– New multi-modal terminals/trading hubs at destination markets (i.e.Cushing, OK, St. James, LA, Pt. Arthur, TX, Albany, NY, Bakersfield,CA)– Lease and purchase of railcar fleets– Pipeline expansions, reversals, new construction Refineries installing unit train receiving capability - particularlycoastal refineries previously captive to waterborne imports (i.e.Philadelphia, PA, St. John, NB, Anacortes, WA, Ferndale, WA) Constantly changing trading and logistics patterns for light/sweetmid continent crudes– Original crude-by-rail primary destination of Cushing now beingbypassed– Crude by rail now supplying ~20% of east coast refining demand– 200 M/bpd or 40% of Bakken crudes via rail are being delivered to St.James, LASource: Petromatrix38
  39. 39. 39Logistics Challenges of Light/Sweetvs. 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) Light/sweet requires less downstream processing Heavy/sour has higher sulfur content Bakken has higher gas, jet, and distillate yield than peer crudes» Refineries are generally configured to run certain types of crude Significant investments made ($48B since 2005) at select refineries to install coker units that willallow processing of heavy/sour Major heavy/sour refining clusters: Corpus Christi, Houston, Chicago, southern Illinois, Ohio,California US is close to saturation point on light/sweet crude at mid-continent and USGC 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 atUSGC) Pipeline capacity to US Midwest refining centers is at capacity Pipeline developments to coasts, US markets still 2+ years away, while tank car supply constrainsrail options Option to ship dilbit in GP oil-spec tank cars, OR undiluted bitumen in coiled, insulated cars Canadian bitumen trading at ~$30 discount vs. Mexican Maya Estimated transport cost via rail $22-30/bbl; $14-16/bbl via pipeline
  40. 40. 40Looking Ahead:North American Crude Oil» The gusher of new US light/sweet shale oil production madepossible by fracking has upended the traditional oil logistics andtrading patterns 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, OilSands, Permian, coastal areas and intermediate routes and facilities that support bitumen transportin particular» The biggest current bottleneck: Railcars Current order backlog runs to early 2015 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» A “new normal” in crude oil flows will emerge in conjunction withcontinued North American oil production over the next five years Continued shifts of mid-continent light/sweet to coastal destinations New modes and infrastructure to get Canadian bitumen to USGC, with or withoutKeystone XL Permian, Eagle Ford to meet USGC light/sweet demand; Bakken flows primarily east-west Eventual government approval of crude oil exports on a limited basis, similar to LNG Primary risk to crude-by-rail business: WTI-Brent spreadKeyDriversDestinationMarketsOilPriceLogisticsCapitalSource: CME and Morningstar
  41. 41. 41Looking Ahead: Crude Oil AnticipatedProduction Growth and Product Flows= Light/Sweet= Heavy/Sour= Pipeline= Marine= Rail= Storage terminal(s)= Refinery cluster – LightSweet/Intermediate= Refinery cluster – HeavySour/Intermediate= Current b/d (000)= Future b/d (000) additional by 2017+420123Bakken+855704Oil Sands+9821,615Eagle Ford+1,087352Permian+607514Source: BENTEK Energy, CAPP, Railroad Commission of Texas, PLG Consulting 41
  42. 42. 42Thank You!For follow up questions and information, please contact:Graham Brisben, CEO+1 (708) 386-0700 / gbrisben@prologisticsgroup.com
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