Rail summit 06062014 final


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Rail summit 06062014 final

  1. 1. Logistics Engineering SupplyChain Why Shale Gas will Drive a US Manufacturing Revolution ByTaylor Robinson PLG Consulting President June 6, 2014
  2. 2. 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 Partial Client List Why Shale Gas will Drive a US Manufacturing Revolution
  3. 3. 3 Today’s Agenda  What is “new energy” and why is it a game changer for the US industrial world?  Impact of shale natural gas and NGL supply streams on US and global markets  Downstream impact of shale gas on US manufacturing industries  Is shale gas a global phenomenon? Why Shale Gas will Drive a US Manufacturing Revolution
  4. 4. 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 Why Shale Gas will Drive a US Manufacturing Revolution
  5. 5. 5 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 Why Shale Gas will Drive a US Manufacturing Revolution
  6. 6. 6 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 FrackingTechniques Drive Increased Production At Lower Costs Source: Marathon, February 2014 Source: EIA Drilling Productivity Report, May 2014 Why Shale Gas will Drive a US Manufacturing Revolution
  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 Availability of low cost hydrocarbons positively impact all the North American industrial economy Why Shale Gas will Drive a US Manufacturing Revolution
  8. 8. 8 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 Rig Count by Class vs. Gas Production Source: Bentek, September 2013 Source: RBN Energy, January 2014 Why Shale Gas will Drive a US Manufacturing Revolution
  9. 9. 9 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 WTI & Henry Hub Natural Gas Energy Equivalent Pricing Source: EIA, February 2014 ~5X Source: International Energy Agency, October 2013 *estimate Why Shale Gas will Drive a US Manufacturing Revolution
  10. 10. 10 Dry and Wet 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” Ethane overabundance causing deflated pricing Why Shale Gas will Drive a US Manufacturing Revolution
  11. 11. 11 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 proposed Atlantic Sunrise project and SabalTrail project would connect Marcellus all the way toCentral 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 Source: Enbridge, April 2014 NaturalGas Movements Why Shale Gas will Drive a US Manufacturing Revolution
  12. 12. 12 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 Source: IHS Energy Why Shale Gas will Drive a US Manufacturing Revolution
  13. 13. 13 Natural Gas Liquids (NGLs) Pipelines from Utica/Marcellus  Mariner East to Marcus Hook, PA for export  Mariner West exports to Sarnia, ON  ATEX to Mt. Belvieu,TX  Proposed Utica Marcellus Texas 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 Source: MarkWest, PLG analysis, March 2014 Sarnia, ON Mt Belvieu, TX Marcus Hook, PA Source: RBN Energy, January 2014 Why Shale Gas will Drive a US Manufacturing Revolution
  14. 14. 14 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 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 Why Shale Gas will Drive a US Manufacturing Revolution
  15. 15. 15 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 GulfCoast 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 Why Shale Gas will Drive a US Manufacturing Revolution
  16. 16. 16 2008 2010 2012 2014 2016 2018 2020 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 North America 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 Why Shale Gas will Drive a US Manufacturing Revolution
  17. 17. 17 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 Falling Gas Prices a Boon to DRI Production Source: GE Capital presentation, November 2013 Why Shale Gas will Drive a US Manufacturing Revolution
  18. 18. 18 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 andAsia 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 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 Why Shale Gas will Drive a US Manufacturing Revolution
  19. 19. 19 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 Why Shale Gas will Drive a US Manufacturing Revolution
  20. 20. 20 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? 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 Why Shale Gas will Drive a US Manufacturing Revolution
  21. 21. Logistics Engineering SupplyChain This presentation is available at: www.plgconsulting.com/categories/presentations - ThankYou ! For follow up questions and information, please contact: Taylor Robinson, President +1 (508) 982-1319 / trobinson@plgconsulting.com