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Logistics Engineering SupplyChain
Shale Development:
The Evolving
Transportation
Impacts
Prepared for:
June 6, 2014
The Ra...
2
Boutique consulting firm with team members
throughout North America
 Established in 2001
 Over 90 clients and 250 enga...
3
What is behind the North American energy revolution?
Resources
• N.A. shale plays
• Western Canadian
oil sands
Technolog...
4
Unconventional Energy Resources
North America Shale Western Canada Oil Sands
Source: CAPP, About Oil
Sands, June 2013
Ne...
5
Convergence of hydraulic fracturing and
horizontal drilling in last five years
 Fracking first used in 1947
 Revolutio...
6
More well bores per well pad
 Directional bores to multiple shale layers
 Reduced well spacing per acreage – increases...
7
Oil (bitumen) recovery uses two main methods
- mining and drilling (in situ)
 20% of the Oil Sands reserves are close e...
8
Russia
 Siberian reserves are said to be 80X of Bakken
 Total, Shell, Exxon, Statoil all investing
 Second place soon...
9
Shale Supply Chain and Downstream Impacts
Feedstock (Ethane)
Byproduct
(Condensate)
Home Heating
(Propane)
Other Fuels
O...
10
U.S. Frac Sand IndustryTrends
Sand
33%
Rail - Freight, FSC
and Eqp Lease
42%
Destination
Transload &
Trucking
25%
Total...
11
Natural gas now supplying 27% of U.S.
Electricity Generation
 US coal electricity generation share capture has
dropped...
12
2008 2010 2012 2014 2016 2018 2020
Shale Development: The Evolving Transportation Impacts
Source: American Chemistry Co...
13
Shale Gas History and Future Demand
Gas production has increased over past five years
with a significantly lower gas ri...
14
The “Re-Plumbing” of Hydrocarbons in North America
Shift from coastal to mid-continent
supply points necessitated “re-
...
15
Repurposing and retirement of some
existing pipelines
 New natural gas production has localized the supply
of natural ...
16
Natural Gas Liquids (NGLs) Pipelines
from Utica/Marcellus
 Mariner East to Marcus Hook, PA for export
 MarinerWest ex...
17
Basic Facts About Crude Oil – Grades and Qualities
Heavy/sour
 Higher sulfur content, yield for asphalt & diesel
 Sou...
18
Light/Sweet Crude Logistics
Sources: EIA, PLG analysis (Google Earth)
Light/Sweet
Heavy/Sour
Pacific
Northwest
Refiners...
19
Sources: EIA, PLG analysis (Google Earth)
Light/Sweet
Heavy/Sour
Pacific
Northwest
Refiners
California
Refiners
2,525
k...
20
Refined Products Market Dynamics
U.S. shifted to net exporter of refined
products
 Mitigated the impact of declining d...
21
All oil sands pipelines are under
intense scrutiny and subject to court
challenges
None of these developments will
proc...
22
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...
23
Correlation of Operating Rig Count with Sand and Crude Carloads Handled
STCC 14413 (sand) and 13111 (petroleum) Source:...
24
Shale Related RailTraffic Still Small Relative to CoalVolumes
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2008
20...
25
Coal, Crude & SandTrends: Carloads and Revenue
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
-
1
2
3
4
5
6
7
8
9
10
Billions
Milli...
26
0
200
400
600
800
1,000
1,200
Mbbl/d ND Crude Production and RailTransport
ND Production Crude by Rail
The Importance o...
27
Source: AAR, North Dakota Pipeline Association, Surface Transportation Board, PLG Analysis, May 2014
Crude by Rail Stat...
28
Shale Development and Crude By Rail: Current Market Dynamics
Adverse 3Q 2013 market forces have reversed
 WTI-Brent sp...
29
Crude RailTerminalsThrough 2017
85 load terminals
Largest and most efficient
in Bakken
69 unload terminals
Majority on ...
30
Bakken and Oil Sands Crude OilTakeaway Forecast
Source: www.CBRforecast.com
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000...
31
High Profile Accidents Changing Crude by Rail
Rail industry has a strong safety record, but optics of
CBR accidents are...
32
Bakken Crude HigherVolatility
Shale Development: The Evolving Transportation Impacts
33
LNG Export Opportunity
Political/policy battle between domestic
industrial users and producers
Only FERC approved LNG e...
34
Panama Canal Expansion
 Has been delayed and now expected at full
capacity by 2016
 Current Panamax vessel size exclu...
35
U.S. energy officials considering easing federal
laws that prohibit exports of most crude
 Rising production of light ...
Logistics Engineering SupplyChain
This presentation is available at:
www.plgconsulting.com/categories/presentations
-
Than...
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  1. 1. Logistics Engineering SupplyChain Shale Development: The Evolving Transportation Impacts Prepared for: June 6, 2014 The Rail Summit
  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 Shale Development: The Evolving Transportation Impacts Partial Client List
  3. 3. 3 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 Shale Development: The Evolving Transportation Impacts
  4. 4. 4 Unconventional Energy Resources North America Shale 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  “Mass production” methodologies developed  Multi-billion dollar capital investments required by few players  Production process will harvest oil over long term Source: EIA, May 2014
  5. 5. 5 Convergence of hydraulic fracturing and horizontal drilling in last five years  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  Oil /Gas rig count split at ~80% / 20% from ~20% / 80% five years ago ShaleTechnology Introduction GAS OIL THERMAL Source: Baker Hughes Shale Development: The Evolving Transportation Impacts
  6. 6. 6 More well bores per well pad  Directional bores to multiple shale layers  Reduced well spacing per acreage – increases well density  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 additionalsand 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 Shale Development: The Evolving Transportation Impacts Source: EIA Drilling Productivity Report, May 2014
  7. 7. 7 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 Shale Development: The Evolving Transportation Impacts
  8. 8. 8 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 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 ShaleOil Resources (Billion bbls) 0 200 400 600 800 1,000 1,200 ShaleGas Resources (Tcf) Technically Recoverable Resources, Source: EIA, June 2013 Shale Development: The Evolving Transportation Impacts
  9. 9. 9 Shale Supply Chain and Downstream Impacts Feedstock (Ethane) Byproduct (Condensate) Home Heating (Propane) Other Fuels Other Fuels Gasoline Gas NGLs Crude Proppants OCTG Chemicals Water Cement Generation Process Feedstocks All Manufacturing Steel Fertilizer (Ammonia) Methanol Chemicals Petroleum Products Petro-chemicals Inputs Wellhead Direct Output Thermal Fuels Raw Materials Downstream Products RAIL INDUSTRY DEMAND2010 onward 2016 onward Shale Development: The Evolving Transportation Impacts
  10. 10. 10 U.S. Frac Sand IndustryTrends Sand 33% Rail - Freight, FSC and Eqp Lease 42% Destination Transload & Trucking 25% Total DeliveredCost perTon ~ $122 Source: PLG analysis using BNSF public pricing – does not include fixed assets at origin or destination, December 2013 Logistics costs drive ~ 67% of total delivered sand cost Rapid growth and maturation of both industries (hydraulic fracturing and sand production) over the past 5 years Sand supply base growing and consolidating at the same time  Mines continue to open; supply base is consolidating  Large fluctuations in price of sand based on supply/demand balance Significant production growth beyond WI in IL and MO due to new demand for 100 mesh sand Unit train shipping is the game-changing logistics development – spurring investment in larger load-out sand transload facilities “Benchmark” high-efficiency unit train example – Illinois to South Texas  Single-line haul (one rail carrier), private railcars achieving two round trips per month, origin sand facility has direct rail load-out and destination trucking is less than 100 miles Shale Development: The Evolving Transportation Impacts
  11. 11. 11 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 Natural Gas Displacement of Coal forThermal Generation Shale Development: The Evolving Transportation Impacts Source: Devon Energy Investor Presentation, June 2014 U.S. Natural Gas Cumulative Coal Retirement Demand Forecast
  12. 12. 12 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 I - Gas & Power-intensive Industries: Steel, Fertilizer, Methanol Phase II - Downstream Products: Resins, Chemicals 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 SHALE GAS BOOM
  13. 13. 13 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 Source: RBN Energy, January 2014 Shale Development: The Evolving Transportation Impacts 0 10 20 30 40 50 60 70 80 0 500 1,000 1,500 2,000 2,500 Rig Count with Natural Gas Production Gas Oil U.S. Natural Gas Production rigs Bcf/d Source: Baker Hughes, EIA, PLG Analysis, June 2014
  14. 14. 14 The “Re-Plumbing” of Hydrocarbons in North America 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 Source: Enbridge, April 2014 Oil Sands Bakken Eagle Ford Permian Marcellus Source: EIA, PLG Analysis (Google Earth), April 2014 Shale Development: The Evolving Transportation Impacts
  15. 15. 15 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 with some converted to crude oil New natural gas pipelines are being built to transport natural gas out of Marcellus  REX, Phillips 66,Transcanada, Kinder Morgan, DominionTransmission, Spectra Energy, Boardwalk Pipeline Partners, andWilliams all involved latest build-out of Marcellus gas pipeline capacity  New projects will provide more than 9 Bcf/d of new take-away capacity – most slated for completion in 2015 – 2017 (RBN Energy, May 2014)  Existing gas pipelines are being made bi-directional to allow flow towardsGulf Coast (not away), particularly for LNG export projects Historic reversals of import/export trade flows  Northeast US-Canadian Maritimes New Patterns in Natural Gas Supply & Demand Source: Enbridge, April 2014 NaturalGas Movements Shale Development: The Evolving Transportation Impacts
  16. 16. 16 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 Source: MarkWest, PLG analysis, March 2014 Sarnia, ON Mt Belvieu, TX Marcus Hook, PA Shale Development: The Evolving Transportation Impacts Source: Devon Energy Investor Presentation, June 2014 NGLs Demand - LPG Exports
  17. 17. 17 Basic Facts About Crude Oil – Grades and Qualities 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 USGulf 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 Shale Development: The Evolving Transportation Impacts
  18. 18. 18 Light/Sweet Crude Logistics Sources: EIA, PLG analysis (Google Earth) Light/Sweet Heavy/Sour 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 ANS Brent Brent Rail Pipeline Marine Shale Development: The Evolving Transportation Impacts
  19. 19. 19 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 OilSands Heavy/Sour Crude Logistics Rail Pipeline Marine Mexican Maya Shale Development: The Evolving Transportation Impacts
  20. 20. 20 Refined Products Market Dynamics 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 Shale Development: The Evolving Transportation Impacts
  21. 21. 21 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 Likely Built at Some Point  Trans Mountain Express (Kinder Morgan)  Alberta Clipper (Enbridge)  Keystone XL (TransCanada) Unlikely  Northern Gateway (Enbridge)  Energy East (TransCanada) Shale Development: The Evolving Transportation Impacts
  22. 22. 22 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, Jan. ’14) Pipeline build-out from Guernsey,WY  230 kbpd Pony Express pipeline to Cushing (under construction)  Possibility of twinning Express-Platte pipeline system through Guernsey toWood River, IL US Crude Oil Pipelines Pipeline Capacity toTexas Gulf Coast Source: RBN Energy, December 2013 Shale Development: The Evolving Transportation Impacts
  23. 23. 23 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, May 2014 0 500 1,000 1,500 2,000 2,500 0 50,000 100,000 150,000 200,000 250,000 2007 Avg. 2008 Avg. 2009 2010 2011 2012 2013 2014 OperatingOnshoreRigs CarloadsHandled Operating On Shore Rigs All Sand Carloads Petroleum Carloads Shale Development: The Evolving Transportation Impacts
  24. 24. 24 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 2014 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, March 2014 Shale Development: The Evolving Transportation Impacts
  25. 25. 25 Coal, Crude & SandTrends: Carloads and Revenue $0 $2 $4 $6 $8 $10 $12 $14 $16 $18 - 1 2 3 4 5 6 7 8 9 10 Billions Millions Carloads Revenue $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 $4.0 $4.5 - 200 400 600 800 1,000 1,200 1,400 Billions Thousands Sand Crude Revenue STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop Total Coal Carloads and Revenue Combined Sand and Crude Carloads and Revenue Shale Development: The Evolving Transportation Impacts
  26. 26. 26 0 200 400 600 800 1,000 1,200 Mbbl/d ND Crude Production and RailTransport ND Production Crude by Rail The Importance of Price Differentials to Crude by Rail Differentials made rail attractive  Bakken and WTI 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 by April 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 Source: North Dakota Pipeline Authority, PLG Analysis, May 2014 Shale Development: The Evolving Transportation Impacts
  27. 27. 27 Source: AAR, North Dakota Pipeline Association, Surface Transportation Board, PLG Analysis, May 2014 Crude by Rail Statistics 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 - 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 * *2014-Q2 quarterly rate through May 24 Shale Development: The Evolving Transportation Impacts
  28. 28. 28 Shale Development and Crude By Rail: Current Market Dynamics Adverse 3Q 2013 market forces have reversed  WTI-Brent spread now ~$5.50/bbl CBR rebound driven by Bakken to coasts  Weak long-term outlook for Bakken CBR to USGC  Key driver: LLS now aligned with WTI, not Brent “Next wave” of CBR development: Canadian Oil Sands  Terminal investments in Alberta and PADD II and III  Over 1,300 kbbl/day planned AB loading capacity through 2015  NOT like the Bakken – more challenges  Complexities of heavy/sour product handling (steaming, diluent, unit train challenges)  Fewer destinations  Existing – and growing – mode competition to logical markets (pipelines and barge)  Tank car market reorienting to coiled/insulated car types (~2/3 of CBR fleet order backlog) Source: EIA, May 2014 Source: RBN Energy, May 2014 Brent vs.WTI Spread ($/bbl) Crude Oil Differentials ($/bbl) Shale Development: The Evolving Transportation Impacts
  29. 29. 29 Crude RailTerminalsThrough 2017 85 load terminals Largest and most efficient in Bakken 69 unload terminals Majority on the Coasts and Mississippi River Shale Development: The Evolving Transportation Impacts
  30. 30. 30 Bakken and Oil Sands Crude OilTakeaway Forecast 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 Shale Development: The Evolving Transportation Impacts
  31. 31. 31 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 Shale Development: The Evolving Transportation Impacts
  32. 32. 32 Bakken Crude HigherVolatility Shale Development: The Evolving Transportation Impacts
  33. 33. 33 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 13 other US potential export terminals along with 3 Canadian proposed sites and 10 other Canadian potential sites Supply Sources Oil Prices Destination Markets Capital 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 Pascagoula, MS 1.5 Shale Development: The Evolving Transportation Impacts Source: FERC, May 2014 Source: Waterborne Energy from FERC presentation, April 2014 Data in $US/MMbtu
  34. 34. 34 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 Shale Development: The Evolving Transportation Impacts
  35. 35. 35 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 toAsia as a petrochemical feedstock  Brent (international crude benchmark) and LLS prices would most likely converge as they are both light crude prices on water  “Landlocked” crude prices (ieWTI and Bakken) would most likely rise higher closer to international prices  Export of Canadian crude via the U.S. would be simpler without the complication of keeping U.S. diluent separate from Canadian crude  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 Possibility of Lifting Crude Oil Export Ban Source: RBN Energy, May 2014 Shale Development: The Evolving Transportation Impacts
  36. 36. Logistics Engineering SupplyChain This presentation is available at: www.plgconsulting.com/categories/presentations - ThankYou ! For follow up questions and information, please contact: Graham Brisben, CEO +1 (708) 386-0700 / gbrisben@plgconsulting.com
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