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PLG Headlines General Session at NAFTANEXT Conference ...

PLG Headlines General Session at NAFTANEXT Conference

PLG Consulting’s CEO, Graham Brisben, and President, Taylor Robinson, delivered the General Session presentation entitled New Energy: The Game-Changer in North America on Thursday, April 24 at the 2014 NAFTANEXT Conference.

Held in Chicago, IL, NAFTANEXT is a tri-national summit focused on the future of North American supply chains. The agenda of this annual event touches on environmental, energy, safety, and profitability issues in the freight industry.

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    Naftanext04242014final Naftanext04242014final Presentation Transcript

    • Logistics Engineering Supply Chain New Energy: The Game Changer in North America ByTaylor Robinson & Graham Brisben Prepared for: April 24, 2014 NAFTANEXT Energizing Sustainable Trade Corridors Across North America
    • 2 Boutique consulting firm with team members throughout North America  Established in 2001  Over 90 clients and 250 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 & operations  Hazmat training, auditing & risk assessment  M&A/investments/private equity Industry verticals  Energy  Bulk commodities  Manufactured goods  Financial services About PLG Consulting New Energy: The Game Changer in North America Partial Client List
    • 3 Today’s Agenda Taylor  What is “new energy” and why is it a game changer?  Impact of new crude oil, natural gas and NGL supply streams  Downstream impact on NAFTA manufacturing industries  What is the impact to Mexico?  Will the rest of the world catch up in shale? Graham  Changes in North America energy logistics New Energy: The Game Changer in North America
    • 4 What is behind the North American energy revolution? Resources • N.A. shale plays • Western Canadian oil sands Technologies examples • Hydraulic fracturing • Horizontal drilling • Steam Assisted Gravity Drainage (SAGD) • Evolving exploration and production technologies • Tremendous productivity gains drives cost reductions • Logistics infrastructure “re-plumbing” in progress • Product abundance… overabundance • Imports displaced… exports grow • Recoverable resources grow…sustainability • Globally competitive power and material cost structure • Manufacturing industries grow/return to North America Recoverable Resources & Enabling Technologies Continuous Improvement Energy Revolution
    • 5 Unconventional Energy Resources North America Shale Source: EIA, May 2011 Western Canada Oil Sands Source: CAPP, About Oil Sands, June 2013 New Energy: The Game Changer in North America  New production technology developed by small entities allowing numerous players to enter market  “Mass production” methodologies developed  Multi-billion dollar capital investments required by few players  Technology allowing for economic recovery of world’s third largest reserve
    • 6 Convergence of hydraulic fracturing and horizontal drilling in past decade  Fracking first used in 1947  Revolutionary advances since 2009  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  Location of shale plays Rapid ROI for E&P companies  Typical well earns back capital cost in 1-2 years  Depending on play productivity, “break even” price of ~$65/bbl (WTI) for oil and $3.50/Mbtu for gas  Liquid plays providing highest returns currently and a majority of drilling rigs are focused on liquids  Intentional dry gas drilling still flat ShaleTechnology Introduction GAS OIL THERMAL Source: Baker Hughes New Energy: The Game Changer in North America
    • 7 New fracking techniques include: More well bores per well pad  Directional bores to multiple shale layers  Reduced well spacing per acreage – increases  Zipper wells – stimulating two wells in tandem Optimal lateral lengths  Lateral lengths had tripled since the start of horizontal drilling, but this trend is being challenged by new practices Zone fracturing  Micro-fracture testing at multiple points vs. one average test that enables highest extractions of each zone Shorter, fatter fractures  Bigger holes in casing combined with additional sand and water use Productivity gains continue!  Time required for drilling 15,000+ ft. well cut in half in last two years (9 days vs. 18 days)  Eagle Ford example – new well oil production per rig has increased by 150% over past 3 years  Lowers break even costs drive profitability improvements New Fracking Techniques Drive Increased Production At Lower Costs Source: Marathon, February 2014 New Energy: The Game Changer in North America Source: EIA Drilling Productivity Report, April 2014
    • 8 Oil (bitumen) recovery uses two main methods - mining and drilling (in situ)  20% of the Oil Sands reserves are close enough to the surface to be mined using shovels and trucks (3% of oil sands land area)  80% of the Oil Sands reserves will be recovered in situ by drilling wells (97% of oil sands land area) Steam Assisted Gravity Drainage (SAGD) is most popular method  Two parallel wells are drilled  Upper well has high pressure steam continuously injected  Lower well recovers softened bitumen Diluent is added to the bitumen (15~30%)  Diluent is very light oil or “condensate”  Enables the product to flow through pipelines and be loaded into rail cars Bitumen extraction has become profitable as extraction technologies improved  Economical at ~ $ 45 - $ 65/bbl Oil Sands Production Processes Mining Source: www.epmag.com Drilling - SAGD New Energy: The Game Changer in North America
    • 9 North American Crude Oil Growth Source: Valero Investor Presentation, March 2014 Western Canadian oil sands crude is heavy/sour  Canada has the 3rd largest oil reserves in the world  Largest single play in North America  Heavy/sour crude has a natural home at US Gulf Coast with ~2.8 MM bpd demand  Increasing exports toAsia in the future Shale play crudes are light/sweet  Bakken, Eagle Ford and Permian are “Big 3”  US crude is quickly displacing much of the imports at USGC and Midwest refineries  US crude oil production is highest since 1988 at 7.9MMbbls/day US crude oil cannot be exported without federal authorization today (except to Canada)  Petroleum products can be exported and net exports have grown to 1,950 kbpd in 2014-Q1 (gasoline, diesel)  Light shale crude quickly displacing foreign imports and may lead to over-supply situation  Large amounts of very light crude (“condensate”) from shale is driving investment into splitters (processing units) to enable product export from USGC New Energy: The Game Changer in North America Source: Enbridge Investor Presentation, April 2014 North American Crude Supply Growth: 2013-2025
    • 10 Shale Supply Chain and Downstream Impacts Feedstock (Ethane) Byproduct (Condensate) Home Heating (Propane) Other Fuels Gasoline Diesel Gas NGLs Crude Proppants OCTG Chemicals Water Cement Generation Process Feedstocks All Manufacturing Steel Fertilizer (Ammonia) Methanol Chemicals Petro-chemicals Other Petroleum Products Inputs Wellhead Direct Output Thermal Fuels Raw Materials Downstream Products Jet Fuel New Energy: The Game Changer in North America Availability of low cost hydrocarbons positively impact all the North American industrial economy
    • 11 Shale Gas History and Future Demand Gas production has increased over past five years with a significantly lower gas rig count  1,000 rigs at peak down to ~300 rigs  Drilling productivity continues to increase production per well and lower costs  And the Liquids (Crude, NGL) wells produce dry natural gas as a by-product Abundant US gas recoverable reserves  Low cost reserves in accessible locations near population  Marcellus gas production is the “eighth largest country” already  US will become a net gas exporter by 2020 US gas demand will grow due to:  Coal-fired generation plant converting to gas  More industrial use – steel, fertilizer, methanol  Mexican export via pipeline and LNG export overseas  Increasing use as transportation fuel US gas cost competitiveness is sustainable  Supply will overwhelm demand as prices approach $5  US government and capital constraints will likely limit LNG export to protect US from world gas market price New Energy: The Game Changer in North America Rig Count by Class vs. Gas Production Source: Bentek, September 2013 Source: RBN Energy, January 2014
    • 12 Shale Gas Is ImportantTo Competitive Power Costs Natural gas is ~5X cheaper than oil on a BTU-basis  Innovation will convert more transportation fuels and other energy requirements to natural gas US electricity prices are the lowest in the industrial world  US industries now have substantial power cost advantage  Gas drives an increasing share of the US electricity generation capacity  Will continue to displace coal due to stricter environmental regulations on coal-fired facilities Natural gas is a cleaner burning fuel compared to other hydrocarbons New Energy: The Game Changer in North America WTI & Henry Hub Natural Gas Energy Equivalent Pricing Source: EIA, February 2014 ~5X Source: International Energy Agency, October 2013 *estimate
    • 13 Dry andWet GasTurn Into Downstream Products  All shale plays have gas as a major or minor portion of the product stream  Processing required at each step Raw Natural Gas (1500+ BTU) Processing Plant Consumer Quality Dry Natural Gas Methane Ethane 42 – 65% Propane ~28% Normal Butane ~8% Iso-Butane ~9% Natural Gasoline ~13% NGLs (3 -9 gallon / MCF) Y-Grade Key Petrochemicals $/MMBtu Methane $4.53 Ethane $3.64 Propane $11.41 Iso-Butane $16.01 Normal Butane $11.43 Natural Gasoline $20.35 Source: Opis, April 2014 & CME Group, April 2014 “Dry” “Wet” New Energy: The Game Changer in North America Ethane overabundance causing deflated pricing
    • 14 Processing infrastructure being installed to handle increased NGL supply  New facilities near shale plays  Domestic ethane supplies to quadruple by 2025  Exports of NGLs will continue to grow NGLs are building blocks in chemical supply chain  US has shifted their petrochemical supply stream to >90% ethane-based to leverage supply/cost advantage Overabundance of NGLsWill Grow Source: IHS Chemical, September 2013 New Energy: The Game Changer in North America Source: IHS Energy
    • 15 2008 2010 2012 2014 2016 2018 2020 Shale Development: The Evolving Transportation Impacts Source: American Chemistry Council, February 2014 >$100B of Chemical Expansion Announced Phase III – “Manufacturing”: Raw material cost driven Phase I – Industries using gas as primary feedstock have global cost competitiveness; new US factories being built Phase II – Downstream products require significant processing facilities investment and lead time Phase III – US material cost advantage will enable traditional manufacturing to return to the NorthAmerica as about 65% of the cost of manufactured product is material cost Shale Gas Phased ImpactTo NA Industrial Renaissance Phase II - Downstream Products: Resins, Chemicals Phase I - Gas & Power-intensive Industries: Steel, Fertilizer, Methanol
    • 16 Phase I - Steel, Methanol, & Fertilizer Manufacturing in US Shale gas boom makes direct-reduced iron steel economical  Gas strips oxygen from iron core to make high purity/quality pellets – lower cost vs. scrap steel  $2B+ in new US projects announced  DRI-derived steel of higher quality than that scrap steel U.S. methanol production – 10 projects announced  Methanol is used in numerous downstream chemical products  Captures price spread between low-cost natural gas and methanol allowing move to higher value foreign markets  US currently represents 10% of the global market demand and imports 89% of its supply Natural gas is a feedstock for ammonia production  Represents ~70% of cash costs (CF Industries)  12MM mt new domestic manufacturing capacity announced  Imports will quickly be displaced Source: IHS Energy, September 2013 New Energy: The Game Changer in North America Falling Gas Prices a Boon to DRI Production Source: GE Capital presentation, November 2013
    • 17 Phase II - Low Cost NGLs Provides Significant Cost Advantages for Chemicals and Resins US has a large structural cost advantage due to gas-based ethane for downstream products  Europe and Asia are tied to crude-based naptha as a feedstock for their downstream processing  US production cost of ethylene is ~40% less than Europe and Asia However, US ethylene cracker and processing capacity is tight and ethylene prices are inflated in the short term  Ethane cracker margins have been as high as 50-60 cents/lb  Additional cracker capacity expected in 2016/2017  Margins/prices will moderate as more capacity comes online  New US resin facilities also on the drawing board  Excess resin capacity will promote globally competitive prices and large export increases ktons ktons New Energy: The Game Changer in North America Source: Townsend Solutions, December 2013 Source: Townsend Solutions , December 2013 30,000 40,000 50,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 North America Ethylene Expansions Actual Capacity Additional Capacity Source: Townsend Solutions , December 2013
    • 18 Phase III - Material Cost Advantage Is Key Cost Driver to Future North American Manufacturing Growth Materials normally accounts for 60-70% of manufacturing cost of goods sold (COGS)  Most product cost competition is won or lost here  Shale gas giving NA cost advantage for steel, plastics and chemicals Total labor cost is ~20% of COGS for NA manufacturers  China labor cost in $ will continue to rise due to inflation and currency appreciation  Mexico labor has increased competitiveness vs. China, will recapture manufacturing share for medium/high labor manufacturing Transportation & Logistics costs are in “Other” 15%  Asia/China has 5~10% cost disadvantage due to extra ~ 1 month shipping lead time (major cash flow disadvantage)  Mexico has “near shore” advantage vs. Asia  Transportation costs continue to rise – proximity to market advantage Energy cost is usually less than 5% for final manufacturer  However, energy costs are buried in raw material costs and transportation and can be more substantial in energy-intensive products  US/Canada has a tremendous advantage vs. industrialized world  Mexico’s power costs will become more competitive with shale gas New Energy: The Game Changer in North America
    • 19 Energy Revolution ImpactTo Mexico Shale gas exports to Mexico  Mexico is net importer of natural gas and demand will grow due to increased use for power generation  US imports via pipelines will grow by ~50% over next 5 years Privatization of Mexican oil industry may help reverse production slide  Shale potential in Mexico – Eagle Ford first mover?  Increased interested in deep water oil drilling However, western Canadian bitumen is a natural competitor to Mexican Maya Low cost materials to Mexico from US will stimulate further manufacturing growth New Energy: The Game Changer in North America Source: EIA, March 2014 Source: EIA, October 2012
    • 20 December 2013 energy bill that removed the prohibition against private investment in oil and gas industry  Legal framework for oil and gas development is still not finalized which will be important for private investment to understand taxes and contracts before investing Mexico’s proximity to US refineries and their relative low costs of production make it potentially attractive to US companies  Developers of deep water resources in Gulf of Mexico  Developers of shale plays such as part the Mexican portion of the Eagle Ford Mexico still in early stages of shale oil drilling  Only a few wells with modest results have been drilled  Pemex plans to drill up to 75 shale exploration wells through 2015  US companies could leverage technology and experience to improve economics to make commercial production viable  Estimated first private investment contracts could materialize by 2015 with first investments seen in 2016 Liberalization of Mexican Oil Industry New Energy: The Game Changer in North America Source: OGJ, April 2014
    • 21 Russia  Siberian reserves are said to be 80X of Bakken  Total, Shell, Exxon, Statoil all investing  Second place soon? China  Reserves in remote, mountainous locations  Technology transfer challenges  Only one oil company involved – stifles innovation Argentina  Concerns with governmental regulation, price controls  Struggling with high cost proppants Poland  Reserves not productive so far – Exxon, Marathon gave up  Encouraging recent results? UK  Some gas reserves  Government support, but intense environmental opposition Is Shale Energy A North American Phenomenon? New Energy: The Game Changer in North America Source: EIA, June 2013 0 10 20 30 40 50 60 70 80 Shale Oil Resources (Billion bbls) 0 200 400 600 800 1,000 1,200 Shale Gas Resources (Tcf) Technically Recoverable Resources, Source: EIA, June 2013
    • 22 Shift from coastal to mid-continent supply points necessitated “re- plumbing” the flow of carbon-based energy in North America  Pipeline reversals, repurposing, new starts  Crude by rail comes of age – born in the Bakken Waterborne imports being displaced as shale oil and oil sands production comes online Infrastructure built rapidly to help facilitate new energy movements The “Re-Plumbing” of Hydrocarbons in North America New Energy: The Game Changer in North America Source: Enbridge, April 2014 Oil Sands Bakken Eagle Ford Permian Marcellus Source: EIA, PLG Analysis (Google Earth), April 2014
    • 23 Repurposing and retirement of some existing pipelines  New natural gas production has localized the supply of natural gas for certain areas, therefore, decreasing the need for some existing natural gas pipelines  Some natural gas pipelines being converted to crude oil New natural gas pipelines are being built to transport natural gas out of Marcellus  Together the proposedAtlantic Sunrise project and SabalTrail project would connect Marcellus all the way to Central Florida  Many other smaller pipeline projects are occurring to move Marcellus natural gas Historic reversals of import/export trade flows  Northeast US-Canadian Maritimes New Patterns in Natural Gas Supply & Demand New Energy: The Game Changer in North America Source: Enbridge, April 2014 Natural Gas Movements
    • 24 Natural Gas Liquids (NGLs) Pipelines from Utica/Marcellus  Mariner East to Marcus Hook, PA for export  MarinerWest exports to Sarnia, ON  ATEX to Mt. Belvieu,TX  Proposed Utica MarcellusTexas Pipeline to Mt. Belvieu,Texas (conversion of natural gas pipeline for most of the route) New NGL export projects  Facility expansions and new construction projects in Ferndale,WA and Port of Longview, WA  Further expansions proposed by Enterprise andTarga in their Gulf Coast export facilities  Phillips 66, EnergyTransfer, Williams/Boardwalk and Occidental have all proposed export facilities out of the Gulf Coast Natural Gas Liquids Pipelines and Export New Energy: The Game Changer in North America Source: MarkWest, PLG analysis, March 2014 Sarnia, ON Mt Belvieu, TX Marcus Hook, PA Source: RBN Energy, January 2014
    • 25 Basic Facts About Crude Oil – Grades and Qualities New Energy: The Game Changer in North America Heavy/sour  Higher sulfur content, yield for asphalt & diesel  Sources include  Western Canada (largest single play in North America)  Venezuela  Mexico, Alaska North Slope  Middle East (light/sour)  Significant investments made ($48B since 2005) at select refineries to install coker units that will allow processing of heavy/sour  Heavy/sour crude has a natural home in Midwest and US Gulf Coast (~2.8 MM bpd demand at USGC) Light/sweet  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: RBN Energy
    • 26New Energy: The Game Changer in North America Light/Sweet Crude Logistics Sources: EIA, PLG analysis (Google Earth) Pacific Northwest Refiners California Refiners 2,525 kbpd PADDV Demand Midwest Refiners 3,375 kbpd PADD II Demand East Coast Refiners PADD I Demand 1,075 kbpd LA Gulf Coast Refiners TX Gulf Coast Refiners PADD III Demand 8,150 kbpd Bakken Eagle Ford Permian Rail Pipeline Marine Light/Sweet Heavy/Sour ANS Brent Brent
    • 27New Energy: The Game Changer in North America Sources: EIA, PLG analysis (Google Earth) Light/Sweet Heavy/Sour Pacific Northwest Refiners California Refiners 2,525 kbpd PADDV Demand Midwest Refiners 3,375 kbpdPADD II Demand LA Gulf Coast Refiners TX Gulf Coast Refiners PADD III Demand 8,150 kbpd Oil Sands Heavy/Sour Crude Logistics Rail Pipeline Marine Mexican Maya
    • 28 Refined Products Market Dynamics New Energy: The Game Changer in North America U.S. shifted to net exporter of refined products  Mitigated the impact of declining domestic demand  International demand increasing, especially for diesel  Exports of diesel to Latin America and Europe  Gasoline exports to Latin America Outlet for increasing domestic crude oil which cannot be exported without being processed Source: Valero Investor Presentation, March 2014 Source: Valero Investor Presentation, March 2014 Source: Valero Investor Presentation, March 2014
    • 29 All oil sands pipelines are under intense scrutiny and subject to court challenges None of these developments will proceed at a pace that will match anticipated production levels Canadian Oil Producers adopting CBR as a risk mitigation measure to ensure access to markets in North America and offshore Main driver of crude by rail out of Western Canada will be delta between pipeline capacity and crude oil production Expect Keystone XL to be built but with more delays Western Canada Crude Oil Pipelines New Energy: The Game Changer in North America Likely Built at Some Point  Trans Mountain Express (Kinder Morgan)  Alberta Clipper (Enbridge)  Keystone XL (TransCanada) Unlikely  Northern Gateway (Enbridge)  Energy East (TransCanada)
    • 30 Large pipeline build toTexas Gulf Coast  1.45 MMb/d added in 2012-2013 and 1.92 MMb/d to be added in 2014-2015  Large pipeline projects from Cushing including Keystone Gulf Extension and Seaway pipelines  Other pipeline projects from Permian, Eagle Ford, and Midwest Bakken pipeline export capacity projected to increase to 715 kbpd in 2014 from only 280 kbpd in 2010 (NDPA, January 2014) US Crude Oil Pipelines New Energy: The Game Changer in North America Pipeline Capacity to Texas Gulf Coast Source: RBN Energy, December 2013
    • 31 Correlation of Operating Rig Count with Sand and Crude Carloads Handled STCC 14413 (sand) and 13111 (petroleum) Source: US Rail Desktop, Baker Hughes, Surface Transportation Board, PLG Analysis, March 2014 0 500 1,000 1,500 2,000 2,500 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 2007 Avg. 2008 Avg. 2009 2010 2011 2012 2013 OperatingOnshoreRigs CarloadsHandled Operating On Shore Rigs All Sand Carloads Petroleum Carloads New Energy: The Game Changer in North America
    • 32 Shale Related RailTraffic Still Small Relative to CoalVolumes 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 Railcars Handled: Sand, Crude, & Coal STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop, Surface Transportation Board, PLG Analysis, February 2014 New Energy: The Game Changer in North America
    • 33 The Importance of Price Differentials to Crude by Rail Differentials made rail attractive  Bakken andWTI differential as high as ~$20/bbl vs. Brent in 2012  CBR enables producers to sell at trading hubs with higher benchmarks 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 Refineries install unit train receiving capability  Particularly coastal refineries previously captive to waterborne imports (i.e. Philadelphia, PA, St. John, NB, Washington state) Pipeline capacity underutilized  Rail captures 73% Bakken takeaway byApril 2013 Differentials are both an incentive – and a risk – for crude by rail  3Q 2013 a cautionary note Source: North Dakota Pipeline Authority, January 2014, PLG Analysis New Energy: The Game Changer in North America Source: North Dakota Pipeline Authority, PLG Analysis, April 2014 0 200 400 600 800 1,000 1,200 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mbbl/d ND Crude Production and RailTransport ND Production Crude by Rail
    • 34 Source: AAR, North Dakota Pipeline Association, Surface Transportation Board, PLG Analysis, February 2014 Crude by Rail Statistics - 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 - 50,000 100,000 150,000 200,000 250,000 300,000 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Petroleum & Petroleum Products (carloads/quarter) Crude Originated (carloads/quarter) Williston Crude by Rail (bbls/day) Carloads/Quarter Bbls/Day WTI-Brent equilibrium 3Q3012 WTI-Brent equilibrium 3Q3013 New Energy: The Game Changer in North America
    • 35 Shale Development and Crude By Rail: Current Market Dynamics Adverse 3Q 2013 market forces have reversed  WTI-Brent spread now ~$5.50/bbl CBR rebound driven by Bakken to coasts  Weak long-term outlook for Bakken CBR to USGC  Key driver: LLS now aligned withWTI, not Brent “Next wave” of CBR development: Canadian Oil Sands  Terminal investments in Alberta and PADD II and III  Over 1,300 kbbl/day planned AB loading capacity through 2015  NOT like the Bakken – more challenges  Complexities of heavy/sour product handling (steaming, diluent, unit train challenges)  Fewer destinations  Existing – and growing – mode competition to logical markets (pipelines and barge)  Tank car market reorienting to coiled/insulated car types (~2/3 of CBR fleet order backlog) Source: EIA, April 2014 New Energy: The Game Changer in North America Brent vs.WTI Spread ($/bbl) Source: RBN Energy, April 2014
    • 36New Energy: The Game Changer in North America Crude RailTerminalsThrough 2017 85 load terminals Largest and most efficient in Bakken 69 unload terminals Majority on the Coasts and Mississippi River Source: www.CBRforecast.com
    • 37 Bakken and Oil Sands Crude OilTakeaway Forecast New Energy: The Game Changer in North America Source: www.CBRforecast.com 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 2013 2014 2015 2016 2017 2018 Base CaseTakeaway (kbpd) Pipeline Crude by Rail Local Refining
    • 38 High Profile Accidents Changing Crude by Rail Rail industry has a strong safety record, but optics of CBR accidents are overwhelming any positive statistics Industry, government, media focus on tank car design Railroad operating practices, maintenance equally important  Railroad operating rule changes on hazmat train handling  Increased scrutiny, insurance requirements  Short line and regional railroads in particular  May have consequences in CBR freight rates Increased product testing, documentation and traceability (FRA directive)  Oil chemistry varies by well/pad  Concerns with extremely low flash and boiling points  Bakken terminals at varying levels of compliance New Energy: The Game Changer in North America
    • 39 Bakken Crude HigherVolatility New Energy: The Game Changer in North America
    • 40 LNG Export Opportunity Political/policy battle between domestic industrial users and producers Only FERC approved LNG export terminal is Cheniere Energy’s Sabine Pass LNG in Sabine, LA Proposed US LNG ExportTerminals to FERC (in Bcfd): There are 12 other US potential export terminals along with 3 Canadian proposed sites and 10 other Canadian potential sites Supply Sources Oil Prices Destination Markets Capital New Energy: The Game Changer in North America Data in $US/MMbtu Source: Waterborne Energy from FERC presentation, February 2014 Location Bcfd Location Bcfd Freeport, TX 1.8 Lavaca Bay, TX 1.38 Corpus Christi, TX 2.1 Elba Island, GA 0.35 Coos Bay, OR 0.9 Sabine Pass, LA 1.40 Lake Charles, LA 2.2 Lake Charles, LA 1.07 Hackberry, LA 1.7 Plaquemines Parish, LA 1.07 Cove Point, MD 0.82 Sabine Pass, TX 2.1 Astoria, OR 1.25
    • 41New Energy: The Game Changer in North America Panama Canal Expansion  Has been delayed and now expected at full capacity by 2016  Current Panamax vessel size excludes all but 10% of LNG vessels from using the canal  After expansion, 80% of LNG fleet will be able to use the canal with vessel capacities up to 100 MMcf Benefits for N.A. LNG Exports  Using the expanded Panama Canal will be a natural fit for the large number of proposed Gulf Coast export facilities wanting to reach the growing Asian LNG market  Trip time cut from 64 days to 44 days, greatly improving the competitive position of LNG exports by reducing transportation cost Panama Canal Expansion and North American Exports of LNG Source: Enbridge, April 2014 Source: Enbridge, April 2014
    • Logistics Engineering Supply Chain This presentation is available at: www.plgconsulting.com/category/presentations - ThankYou ! For follow up questions and information, please contact: Graham Brisben, CEO +1 (708) 386-0700 / gbrisben@plgconsulting.com Taylor Robinson, President +1 (508) 982-1319 / trobinson@plgconsulting.com