Logistics	
  	
  	
  	
   Engineering	
  	
  	
  	
   Supply	
  Chain	
  	
  	
  	
  
Shale	
  Development:	
  	
  	
  
Th...
2	
  
Boutique	
  consulting	
  firm	
  with	
  team	
  members	
  
throughout	
  North	
  America	
  
§  Established	
  i...
3	
  
Hot	
  Topics	
  
v  Unconventional	
  production	
  continues	
  to	
  grow!	
  
v  Production	
  and	
  forecast...
4	
  
Unconventional	
  Production	
  Continues	
  to	
  Grow!	
  
Production	
  and	
  forecasts	
  
§  Convergence	
  o...
5	
  
Big	
  Picture	
  Impacts:	
  	
  “Energy	
  Independence”	
  
U.S.	
  liquid	
  fuel	
  demand	
  projected	
  to	
...
6	
  
Big	
  Picture	
  Impacts:	
  	
  Natural	
  Gas	
  vs.	
  Coal	
  
Source:	
  Devon	
  Energy	
  Investor	
  Presen...
7	
  
Shale	
  Supply	
  Chain	
  and	
  Downstream	
  Impacts	
  
Feedstock	
  (Ethane)	
  
Byproduct	
  
(Condensate)	
 ...
8	
  
Manufacturing:	
  Natural	
  Gas	
  Feedstock	
  
Source:	
  RBN	
  Energy,	
  January	
  2014	
  
0
10
20
30
40
50
...
9	
  
Manufacturing:	
  Long-­‐Term	
  Raw	
  Materials	
  Advantage	
  
Source:	
  LyondellBasell,	
  June	
  2014	
  
US...
10	
  
Changing	
  Energy	
  Flows	
  in	
  North	
  America:	
  Pipelines	
  
Western	
  Canada	
  crude	
  oil	
  pipeli...
11	
  
Changing	
  Energy	
  Flows	
  in	
  North	
  America:	
  Crude	
  by	
  Rail	
  
Three	
  phases	
  of	
  crude	
 ...
12	
  
Crude	
  by	
  Rail	
  Regulations	
  and	
  Safety	
  
Rail	
  industry	
  has	
  a	
  strong	
  safety	
  record,...
13	
  
Initially	
  a	
  political/policy	
  battle	
  between	
  domestic	
  
industrial	
  users	
  and	
  producers	
  ...
14	
  
U.S.	
  energy	
  officials	
  considering	
  easing	
  federal	
  
laws	
  that	
  prohibit	
  exports	
  of	
  most...
Logistics	
  	
  	
  	
   Engineering	
  	
  	
  	
   Supply	
  Chain	
  	
  	
  	
  
This	
  presentation	
  is	
  availa...
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Plg broe presentation final v gb 062314

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PLG Consulting’s CEO, Graham Brisben presented his presentation Shale Developments: The Evolving Transportation Impacts to the Broe Group on June 23, 2014.

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Plg broe presentation final v gb 062314

  1. 1. Logistics         Engineering         Supply  Chain         Shale  Development:       The  Evolving   Transportation   Impacts       Prepared  for:       June  23,  2014  
  2. 2. 2   Boutique  consulting  firm  with  team  members   throughout  North  America   §  Established  in  2001   §  Over  100  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   §  Private  equity/hedge  funds/institutional  investors   About  PLG  Consulting   Partial  Client  List   Shale  Development:  The  Evolving  Transportation  Impacts  
  3. 3. 3   Hot  Topics   v  Unconventional  production  continues  to  grow!   v  Production  and  forecasts   v  Evolving  technology   v  Big  picture  impacts:    Energy   v  “Energy  Independence”   v  Gas  vs.  Coal   v  Big  picture  impacts:    Manufacturing   v  Natural  gas  feedstock   v  Long-­‐term  raw  materials  advantage   v  Changing  energy  flows  in  North  America   v  Keystone  XL  and  other  pipelines   v  Crude  by  Rail  –  growth,  sustainability,  safety   v  Energy  exports?   v  LNG   v  Crude  oil       Shale  Development:  The  Evolving  Transportation  Impacts  
  4. 4. 4   Unconventional  Production  Continues  to  Grow!   Production  and  forecasts   §  Convergence  of  hydraulic  fracturing  and  horizontal  drilling  in  last  five   years  has  led  to  rapid  growth  in  U.S.  shale  crude,  natural  gas,  NGL   production   §  Improved  Oil  Sands  extraction  processes  have  led  to  rapid  growth  in   Canadian  production   Source:  www.epmag.com   SAGD  Horizontal  Drilling   Source:  Marathon,  February  2014   Shale  Development:  The  Evolving  Transportation  Impacts   Source:  RBN  Energy,  June  2014   Evolving  technology   §  Horizontal  drilling  in  shale  plays   u  More  well  bores  per  well  pad   u  Optimal  lateral  lengths   u  Zone  fracturing   u  Shorter,  fatter  fractures   u  Productivity  gains  continue!   §  Steam  Assisted  Gravity  Drainage  (SAGD)  in  Oil  Sands   u  Two  parallel  wells  are  drilled   u  Upper  well  has  high  pressure  steam  injected   u  Lower  well  recovers  softened  bitumen   u  Improvements  in  this  technology  has  made   bitumen  extraction  profitable     Source:  CAPP  Report,  June  2014  
  5. 5. 5   Big  Picture  Impacts:    “Energy  Independence”   U.S.  liquid  fuel  demand  projected  to  slightly   decrease     §  Continued  decrease  in  gasoline  demand   §  U.S.  projected  to  still  be  significant  importer   Waterborne  imports  being  displaced  as  shale   oil  and  oil  sands  production  comes  online   §  North  America  to  get  close  to  “Energy  Independent”  as   U.S.  shale  crude  pushes  out  light  crude  imports  and  Oil   Sands  crude  pushes  out  heavy  imports   Infrastructure  built  rapidly  to  help  facilitate   new  energy  movements     Source:  EIA  Annual  Energy  Outlook  Early  Release,  December  2013   U.S.  Petroleum  and  Other  Liquid   Fuels  Supply  &  Consumption   Source:  Enbridge  Investor  Presentation,  June  2014   Shale  Development:  The  Evolving  Transportation  Impacts  
  6. 6. 6   Big  Picture  Impacts:    Natural  Gas  vs.  Coal   Source:  Devon  Energy  Investor  Presentation,  June  2014   U.S.  Natural  Gas     Cumulative  Coal  Retirement  Demand  Forecast   Natural  gas  now  supplying  27%  of  U.S.   electricity  generation     §  US  coal  electricity  generation  share  capture  has   dropped  10%  from  2006   Adversely  affecting  coal  industry,   railroad  coal  loadings   §  2013  coal  production  hit  20  year  low  (less  than   1B  s/t)   §  Export  opportunities  diminishing  due  to  weak   demand  in  Europe,  declining  demand  and   competition  in  Asia   Despite  recent  increases  in  prices,   natural  gas  share  capture  expected  to   maintain  or  grow   §  EPA  proposed  mandate  that  power  plants  cut   CO2  emissions  by  30%  by  2030  from  2005  levels   §  Scheduled  coal  unit  retirements;  55GW  through   2020   Shale  Development:  The  Evolving  Transportation  Impacts  
  7. 7. 7   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   Shale  Development:  The  Evolving  Transportation  Impacts   Impact  years   2010   2011   2012   2013   2016   2018  
  8. 8. 8   Manufacturing:  Natural  Gas  Feedstock   Source:  RBN  Energy,  January  2014   0 10 20 30 40 50 60 70 80 0 500 1,000 1,500 2,000 2,500 U.S.  Rig  Count  with  Natural  Gas  Production   Gas Oil U.S. Natural Gas Production rigs   Bcf/d   Source:  Baker  Hughes,  EIA,  PLG  Analysis,  June  2014   Gas  production  has  increased  over  past  five  years   with  a  significantly  lower  gas  rig  count   §  Drilling  productivity  continues  to  increase  production  per  well   and  lower  costs   Abundant  US  gas  recoverable  reserves   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   Shale  gas  boom  makes  direct-­‐reduced  iron  steel   economical   §  Gas  strips  oxygen  from  iron  ore  to  make  high  purity/quality   pellets  –  lower  cost  vs.  scrap  steel   U.S.  methanol  production  –  10  projects  announced   Natural  gas  is  a  feedstock  for  ammonia  production   §  ~70%  of  cash  costs  (CF  Industries)   §  12MM  mt  new  domestic  manufacturing  capacity  announced   §  However,  headwinds  include  EPC,  labor,  capital  constraints     Shale  Development:  The  Evolving  Transportation  Impacts  
  9. 9. 9   Manufacturing:  Long-­‐Term  Raw  Materials  Advantage   Source:  LyondellBasell,  June  2014   US  has  a  large  structural  cost  advantage  due  to  gas-­‐based   ethane  for  downstream  products   §  Europe  and  Asia  are  tied  to  crude-­‐based  naphtha  as  a  feedstock  for  their   downstream  processing   Currently  US  ethylene  cracker  capacity  is  tight   §  Ethylene  prices  are  inflated  in  short  term  but  additional  capacity  expected   in  2016/2017  which  will  moderate  prices   Materials  typically  account  for  60-­‐70%  of  manufacturing   cost  of  goods  sold  (COGS)   §  Total  labor  cost  is  ~20%  of  COGS  for  NA  manufacturers   §  Transportation  &  logistics  costs  are  in  “Other”  15%   §  Energy  cost  is  usually  less  than  5%  for  final  manufacturer  but  energy  costs   also  buried  in  raw  material  costs  and  transportation     Shale  Development:  The  Evolving  Transportation  Impacts  
  10. 10. 10   Changing  Energy  Flows  in  North  America:  Pipelines   Western  Canada  crude  oil  pipelines   §  All  proposed  Oil  Sands  pipelines  are  under  intense  scrutiny  and  subject  to   court  challenges   §  Pipeline  capacity  will  not  match  anticipated  production  because  of   pipeline  delays  and  producers  have  adopted  crude  by  rail  as  a  risk   mitigation   §  Pipelines  likely  built  in  medium  term  (~  2018  operational)   u  Trans  Mountain  Express   u  Alberta  Clipper   u  Keystone  XL   §  Pipelines  likely  delayed  long  term  (2019  and  beyond)   u  Northern  Gateway   u  Energy  East   US  crude  oil  pipelines   §  Large  pipeline  build  to  Texas  Gulf  Coast  from  Permian     §  Pipeline  capacity  out  of  Bakken  continuing  to  increase   §  Pipeline  build-­‐out  from  Guernsey,  WY  in  progress   New  patterns  in  natural  gas  supply  and  demand   §  Repurposing  and  retirement  of  some  existing  pipelines   §  New  pipelines  being  built  to  transport  gas  out  of  Marcellus   §  Existing  gas  pipelines  are  being  made  bi-­‐directional  to  allow  flow  towards   Gulf  Coast  (not  away),  particularly  for  LNG  export     Source:  Enbridge,  April  2014   Natural  Gas  Movements   Source:  CAPP,  June  2014   Shale  Development:  The  Evolving  Transportation  Impacts  
  11. 11. 11   Changing  Energy  Flows  in  North  America:  Crude  by  Rail   Three  phases  of  crude  by  rail  phenomenon  in   North  America   §  2009-­‐2011   u  CBR  developed  from  the  Bakken  to  bridge  the  gap  until  pipelines   are  built   u  First  unit  train  shipment  in  Dec.  2009   u  Destination  market:    Cushing,  OK  WTI  trading  hub   §  2011-­‐2013   u  Ascendancy  of  trading  as  main  growth  driver  in  CBR   u  WTI-­‐Brent-­‐LLS  differentials  become  all  important   u  St.  James,  LA  LLS  hub  becomes  most  attractive  destination     u  Coastal  refineries  begin  rail  receipt  infrastructure  build-­‐out   u  Tank  car  market  overheats,  becomes  main  growth  constraint   §  2013-­‐current   u  CBR  from  Bakken  assumes  long-­‐term  structural  role  in  crude  oil   market   u  Bakken  CBR  transitioning  to  east  and  west  coast  markets;  LLS   and  WTI  converge  as  Permian  and  Eagle  Ford  growth  floods  USGC   u  Canadian  CBR  build-­‐out  begins;  tank  car  market  reorienting  to   coiled/insulated  car  types  (~2/3  of  CBR  fleet  order  backlog)   0 200 400 600 800 1,000 1,200 Mbbl/d ND  Crude  Production  and  Rail  Transport   ND Production Crude by Rail Source:  North  Dakota  Pipeline  Authority,  PLG  Analysis,  May  2014   Shale  Development:  The  Evolving  Transportation  Impacts   Source:    PLG  CBR  Forecast  (www.CBRforecast.com),  May  2014   Bakken  &  Oil  Sands  Base  Case  Takeaway  (kbpd)    
  12. 12. 12   Crude  by  Rail  Regulations  and  Safety   Rail  industry  has  a  strong  safety  record,  but  optics  of  CBR   accidents  are  overwhelming  any  positive  statistics     Industry,  media,  government  focus  on  tank  car  design   §  Canada  announced  three  year  phase-­‐out  of  non-­‐CPC-­‐1232  cars  in  April  2014   §  New  USDOT  and  PHMSA  regulations  expected  early  2015     Railroad  operating  practices,  maintenance  equally  important   §  Railroad  operating  rule  changes  on  hazmat  train  handling   §  Increased  scrutiny,  insurance  requirements   §  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   Multiple  risk  assessment  initiatives  underway   Shale  Development:  The  Evolving  Transportation  Impacts  
  13. 13. 13   Initially  a  political/policy  battle  between  domestic   industrial  users  and  producers   FERC  approved  LNG  export  terminals     §  Cheniere  Energy’s  Sabine  Pass  LNG  in  Sabine,  LA  (under  construction)   §  Sempra  Energy’s  Cameron  LNG  in  Hackberry,  LA  (approved  6/19/2014)   Proposed  US  LNG  Export  Terminals  to  FERC  (in  Bcfd):             There  are  13  other  US  potential  export  terminals  along   with  3  Canadian  proposed  sites  and  10  other  Canadian   potential  sites       LNG  Export  Opportunity   Location   Bcfd   Location   Bcfd    Freeport,  TX   1.8   Elba  Island,  GA   0.35   Corpus  Christi,  TX   2.1   Sabine  Pass,  LA   1.40   Coos  Bay,  OR   0.9   Lake  Charles,  LA   1.07   Lake  Charles,  LA   2.2   Plaquemines  Parish,  LA   1.07   Cove  Point,  MD   0.82   Sabine  Pass,  TX   2.1   Astoria,  OR   1.25   Pascagoula,  MS   1.5   Lavaca  Bay,  TX   1.38   Source:  FERC   Supply  Sources   Oil  Prices   Destination   Markets   Capital   Source:    Waterborne  Energy  from  FERC  presentation,  April  2014   Data  in  $US/MMbtu   Source:  Enbridge,  April  2014   Shale  Development:  The  Evolving  Transportation  Impacts  
  14. 14. 14   U.S.  energy  officials  considering  easing  federal   laws  that  prohibit  exports  of  most  crude   §  Rising  production  of  light  oil  /  condensate  that  is  not  well-­‐ matched  to  current  U.S.  refinery  capacity   §  U.S.  currently  classifies  condensate  produced  at  well  crude  oil   and  there  is  a  possibility  it  be  reclassified  as  condensate  which   would  allow  for  exports       Implications  if  export  ban  is  lifted   §  Condensate  would  most  likely  be  exported  to  Asia  as  a   petrochemical  feedstock   §  Brent  (international  crude  benchmark)  and  LLS  prices  would   most  likely  converge  as  they  are  both  light  crude  prices  on   water   §  Build  out  of  new  pipelines  and  terminals  to  export  the  crude   §  Likely  a  decrease  in  U.S.  refined  products  export  volumes  and   worse  economics  for  U.S.  refineries  and  condensate  splitters   Possibility  of  Lifting  Crude  Oil  Export  Ban   Source:  RBN  Energy,  May  2014   Shale  Development:  The  Evolving  Transportation  Impacts  
  15. 15. Logistics         Engineering         Supply  Chain         This  presentation  is  available  at:   http://plgconsulting.com/category/presentations/       -­‐   Thank  You  !   For  follow  up  ques-ons  and  informa-on,   please  contact:     Graham  Brisben,  CEO   +1  (708)  386-­‐0700  /  gbrisben@plgconsul-ng.com  
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