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Shale rail summit final

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  • 1. Logistics Engineering SupplyChain Crude-By-Rail (CBR) Phenomenon: Is Rail in it for the Long Haul? Prepared for: June 25, 2014
  • 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  Institutional investors About PLG Consulting Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul? Partial Client List
  • 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 Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
  • 4. 4 Unconventional Energy Resources North America Shale Western Canada Oil Sands Source: CAPP, About Oil Sands, June 2013  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 Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
  • 5. 5 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 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 Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
  • 6. 6 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 Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
  • 7. 7 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 Crude Natural Gas NGLs Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul? Source: Valero Investor Presentation, March 2014 Source: Enbridge Investor Presentation, April 2014 North American Crude Supply Growth: 2013-2025
  • 8. 8 Crude by Rail Historical Perspective Three phases of crude by rail phenomenon in North America  2009-2011  CBR developed from the Bakken to bridge the gap until pipelines are built  First unit train shipment in Dec. 2009  Destination market: Cushing, OK WTI trading hub  2011-2013  Ascendancy of trading as main growth driver in CBR  WTI-Brent-LLS differentials become all important  St. James, LA LLS hub becomes most attractive destination  Coastal refineries begin rail receipt infrastructure build-out  Tank car market overheats, becomes main growth constraint  2013-current  CBR from Bakken assumes long-term structural role in crude oil market  Bakken CBR transitioning to east and west coast markets; LLS and WTI converge as Permian and Eagle Ford growth floods USGC  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 RailTransport ND Production Crude by Rail Source: North Dakota Pipeline Authority, PLG Analysis, May 2014 Source: RBN Energy, May 2014 Brent vs.WTI Spread ($/bbl) Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
  • 9. 9 CBR Movements Have Grown Significantly Since 2011 (and Frac Sand) 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 Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
  • 10. 10 Future of CBR Depends on: In addition to the above factors, need to also analyze:  Rail car capacity  Potential regulatory changes – tank cars, testing, rail operational  Rail network capacity  Impact of anticipated price differentials Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
  • 11. 11 CBR Origin Production Forecasts Shale Development: The Evolving Transportation Impacts Continued Bakken volume growth through forecast period  Improved completion techniques continue to lower break even costs  High quality crude desired by east coast refineries  Some experts believe volume might reach 2MMbpd by 2019 Steady WC growth foreseen  Large capital investments need to be recovered  SAGD becoming dominant method with increased productivity and lowering break even costs  Takeaway capacity is currently limited
  • 12. 12 Bakken pipeline capacity  Currently underutilized (~40% for 2013)  But projected capacity to increase to 715 kbpd in 2014 from only 280 kbpd in 2010 (NDPA, Jan. ’14) Large pipeline build toTexas Gulf Coast  1.45 MMb/d added in 2012-2013 and 1.9 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 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 Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul? Source: North Dakota Pipeline Authority, January 2014, PLG Analysis 40% Utilization?!?!
  • 13. 13 • Current pipelines are at capacity • All oil sands pipelines are under intense scrutiny and subject to court challenges and protests • None of these developments will proceed at a pace that will match anticipated production level growth • Canadian Oil Producers adopting CBR as a risk mitigation measure to ensure ability to move growing production to markets (US and overseas) Inadequate pipeline capacity will drive significantCBR growth until pipelines are commissioned Western Canada Crude Oil Pipelines Likely Built Within Medium Term (~2018)  Trans Mountain Express (Kinder Morgan)  Alberta Clipper (Enbridge)  Keystone XL (TransCanada) Likely Delayed Until 2019 or Later  Northern Gateway (Enbridge)  Energy East (TransCanada) Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
  • 14. 14 Announced Crude RailTerminals Through 2017 85 load terminals Largest and most efficient in Bakken 69 unload terminals Majority on the Coasts and Mississippi River Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul? Are there going to be significant CBR origins outside of Bakken and WC?
  • 15. 15 High Profile Accidents Changing Crude by Rail Rail industry has a strong safety record, but optics of CBR accidents are overwhelming any positive statistics Regulatory approach has focused on:  Prevention – RR operations, track inspections, lower train speeds, increased track-side technology, route planning requirements  Mitigation –Tank car engineering standards, enforcement of product testing & classification  Response – Emergency response planning in case of accident Three key links in supply chain are critical to safety:  At the well – increased enforcement of product testing, documentation and traceability (FRA directive)  Railroad operating practices and maintenance procedures must be robust  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 and lead time  Tank car design regulations  Expect PHMSA to issue new build engineering standards in late 2014  Three to five year (?) grandfather clause expected  Retrofits may be questionable Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul? Example only
  • 16. 16 Brent ANS Brent Sources: EIA, PAALP, Raymond James, CME Group, PLG analysis (Google Earth) PADD I Demand 2,525 kbpd PADD III Demand8,150 kbpd PADDV Demand 1,075 kbpd Light/Sweet Heavy/Sour Light/Sweet Heavy/Sour Light/Sweet Heavy/Sour $93 (wellhead) WTI:$101 $6 Spread May 2014 Brent - WTI $7.86/bbl LLS - WTI $1.80/bbl WTI - Bakken (Clearbrook) $5.50/bbl East Coast Refiners Pacific Northwest Refiners N. California Refiners TX Gulf Coast Refiners LA Gulf Coast Refiners S. California Refiners Marine Rail Pipeline Cushing, OK Chicago, IL Clearbrook, MN St. James, LA Bakken Eagle Ford Permian Niobrara Light/Sweet at PNW Bakken (rail): $106 Brent (ship): $111 Light/Sweet at EC Bakken (rail): $108 Brent (ship): $110 Light/Sweet at LA GC Bakken (rail): $108 LLS (local): $102 Light/Sweet at TX GC Bakken (pipe): $103 Brent (ship): $110 WTI (pipe): $106 Light Crude Market and Price Differentials
  • 17. 17 Oil Sands Hardisty,AB $81 Heavy/Sour at TX GC Mexican Maya (ship): $95 WCS (pipe): $99 WCS (rail): $105 Sources: EIA, CME Group, Raymond James, PLG analysis (Google Earth) Mexican Maya Marine 3,375 kbpd 2,525 kbpd PADD III Demand 8,150 kbpd PADDV Demand Light/Sweet Heavy/Sour Light/Sweet Heavy/Sour Heavy/Sour Light/Sweet PADD II Demand TX Gulf Coast Refiners Pacific Northwest Refiners California Refiners Midwest Refiners Rail Pipeline Clearbrook, MN Chicago, IL Spread Jan. 2013 May 2014 Change Mexican Maya - WCS $38.07/bbl $14.51/bbl -$23.56/bbl Heavy Crude Market and Price Differentials Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
  • 18. 18 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 Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
  • 19. 19 Refined Products Market Dynamics U.S. shifted to net exporter of refined products  Mitigating 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 Splitters in the Gulf Coast could relieve some pressure with potential 445kbpd of capacity  “Processing” of condensate into a petroleum product  Splitters at risk if crude export ban lifted Source: Valero Investor Presentation, March 2014 Source: Valero Investor Presentation, March 2014 Source: Valero Investor Presentation, March 2014 Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
  • 20. 20 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 Possibility of Lifting Crude Oil Export Ban Source: RBN Energy, May 2014 Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
  • 21. 21 Tailwinds  NewWC pipelines will likely be delayed  Increasing Bakken & Oil Sands production  Additional imports still to be displaced in US east, west, GC  TX shale plays increasing light crude volume to USGC  More terminals coming online  Potential for US export regulation easing Crude By Rail Future Drivers Headwinds  Impact of oversupply of light crude in the US 2014~ (market impact?)  Environmental focus at terminals causing delays in permitting (CA,WA)  Tight railcar supply due to new rail car regulations impact  WC pipelines will eventually be built (2018 or beyond) and take CBR share  Potential regulatory backlash from future disasters? (biggest wild card) Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
  • 22. 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 Terry Bunch, VP of Business Development +1 (912) 289-1039 / tbunch@plgconsulting.com

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