PLG Consulting "Crude By Rail Report" at Railtrends

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On November 21, 2013, CEO Graham Brisben presented at Railtrends Conference in New York, NY. Graham’s presentation, entitled “Crude By Rail Report,” is a consolidated version of PLG’s well-known Energy Logistics presentation with an emphasis on the following topics:
• Shale oil and oil sands impacts on crude by rail, new rail terminals, and new pipelines
• Lac Megantic’s effect on crude by rail and the tank car market
• Future crude oil logistics and trading patterns

If you have specific questions on energy related logistics or need strategic advice on the fast changing shale oil and gas industry, contact Graham at gbrisben@plgconsulting.com.

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PLG Consulting "Crude By Rail Report" at Railtrends

  1. 1. Logistics Engineering Supply Chain Crude By Rail Report Prepared for November 22, 2013 New York, NY 1
  2. 2. About PLG Consulting »  Boutique consulting firm specializing in logistics, engineering, and supply chain §  Established in 2001 §  Over 100 clients and 250 engagements »  Headquarters in Chicago USA, with team members throughout the US and with “on the ground” experience in: §  North America / Europe / South America / Asia / Middle East »  Consulting services §  §  §  §  §  Strategy & optimization Assessments & benchmarking Transportation assets & infrastructure Logistics operations M&A/investments/private equity »  Key industry verticals §  §  §  §  §  §  Oil & gas Chemicals & plastics Wind energy & project cargo Bulk commodities (minerals, mining, agricultural) Industrial manufactured goods Private equity 2
  3. 3. The Shale Development Revolution – Big Picture Disruptive Technologies •  Hydraulic Fracturing •  Horizontal Drilling Market Dynamics •  Supply & Demand •  Customers •  Price •  Logistics Continuous Evolution •  Productivity •  Rapid Change 3
  4. 4. Shale Development Supply Chain and Downstream Impacts Inputs >> Wellhead >> Direct Output >> Thermal >> Fuels >> Raw Materials >> Downstream Products All Manufacturing Generation Process Feedstocks Proppants Fertilizer (Ammonia) Gas OCTG Chemicals Water Steel Home Heating (Propane) Methanol Other Fuels NGLs Crude Feedstock (Ethane) Chemicals Byproduct (Condensate) Petroleum Products Cement Petrochemicals Other Fuels Gasoline 4
  5. 5. Railcar Industry Impacts »  Over $95B in new announced “energy intensive” industrial plant expansions will come on-line over the next five years §  ~50% foreign direct investment »  Shale development impact on the railcar industry is long-term, wideranging, and positive with only one exception 5
  6. 6. Shale Play Product Flows Outbound »  Natural Gas §  Majority via pipelines, some trucks »  Natural Gas Liquids (NGLs) §  §  Requires processing (fractionation) 3-9 gallons/MCF (thousand cubic feet) –  –  –  –  –  Ethane Propane Normal Butane Iso-Butane Condensate ~42-65% ~28% ~8% ~9% ~13% »  Crude Oil §  Bakken play as a model 6
  7. 7. “Tight” Oil Sources Driving Overall North American Growth »  Dramatic increases in production due to hydraulic fracturing and horizontal drilling §  §  §  §  §  7.74 MM bbl/day Projected to grow by ~30% over next four years “Tight” oil sources driving overall North American growth Production forecasts frequently revised upward Largest area of nonOPEC growth is North America Source: BENTEK, September 2013 7
  8. 8. Some Basic Facts About Crude Oil: Grades and Qualities »  Not all crudes are created equal – light/sweet vs. heavy/sour §  Heavy/sour sources include –  –  –  –  Western Canada Venezuela Mexico, Alaska North Slope (ANS) Middle East (light/sour) §  Heavy/sour has higher sulfur content, yield for asphalt, diesel »  Refineries are generally configured to run certain types of crude §  Significant investments made ($48B since 2005) at select refineries to install coker units that will allow processing of heavy/sour §  Major heavy/sour refining clusters: –  Texas Gulf Coast –  Chicago –  California Source: RBN Energy 8
  9. 9. Some Basic Facts About Crude Oil: Major Production and Refining Areas »  The special case of the Canada Oil Sands North American Crude Supply Growth: 2013-2025 §  Heavy/sour crude has a natural home in Midwest and US Gulf Coast (~2.8 MM bpd demand at USGC) §  Largest single play in North America »  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: Enbridge investor presentation, October 2013 9
  10. 10. Crude Market Overview ANS Oil Sands Hardisty, AB Pacific Northwest Refiners PADD V Demand 2,400 kbpd Bakken Clearbrook, MN Light/Sweet PADD II Demand Heavy/Sour 3,250 kbpd East Coast Refiners Light/Sweet California Refiners Heavy/Sour Midwest Refiners 1,050 kbpd PADD I Demand Light/Sweet Heavy/Sour Cushing, OK Permian Brent St. James, LA LA Gulf Coast Refiners TX Gulf Coast Eagle Ford Refiners Mexican Maya 7,650 kbpd PADD III Demand Light/Sweet Sources: EIA, PLG Analysis (Google Earth) Venezuela Crude Heavy/Sour West African Brent Middle East 10 West African
  11. 11. Displacement of Waterborne Crudes by Mid-Continent Sources »  Surging domestic production is diminishing imports §  West African imports already down ~70% from 2010 levels »  Shift from coastal to mid-continent supply points necessitated “re-plumbing” the flow of crude in North America §  §  Pipeline reversals, repurposing, new starts Crude by rail comes of age – born in the Bakken Source: Valero Investor Presentation, November 2013 11
  12. 12. Crude By Rail From the Bakken – A Short History »  2009-2010: Objective of crude by rail to “bridge the gap” until pipelines built and get product to market ~932,000 BPD September 2013 §  2010-2011 discount of ~$8-12/bbl for Bakken crude vs. peer WTI §  Undervalued due to logistics constraints “stranding” the oil First outbound unit train shipment December, 2009 »  2011-2012: Significant development of crude by rail loading terminals »  Initial destination is Cushing, OK §  Delivers better price than Clearbrook »  2012-2013: Rail emerges as tool of arbitrage §  Flexibility to sell Bakken crude at other light/ sweet trading hubs – St. James in particular – allows traders to exploit price differentials §  Higher cost of rail vs. pipe is offset by superior “optionality” Map by PLG Consulting 12
  13. 13. Crude Oil by Rail vs. Pipeline »  Rail cost: 50-100% more expensive than pipeline transport »  Near-term offsetting rail advantages: §  §  §  §  Site permitting, construction much faster Lower capital cost Scalable Shorter contracts (2-3 year commitments vs. 10 years for pipeline) Faster transit times Access to coastal areas not connected via pipeline Origin/destination flexibility Primary advantage: Tool of arbitrage for trading desks »  Rail pricing drivers §  Advantaged rate structures for first-movers, volume, and unit train operators §  “Floor” has been set for crude by rail pricing §  Crude price differentials more important than cost vs. pipeline Cost Comparison: Bakken to Cushing and USGC $15.00 $16.00 $14.00 Dollars Per Barrel §  §  §  §  $12.00 $12.00 $10.50 $10.00 $8.00 $6.50 $6.00 $4.00 $2.00 $Pipeline to Cushing Source: PLG analysis Rail to Cushing Pipeline to Pt Arthur Rail to Pt Arthur 13
  14. 14. US Shale Plays and CBR Loading and Offloading Terminals PADD V Demand 2,400 kbpd Light/Sweet 3,250 kbpd PADD II Demand Light/Sweet Heavy/Sour Heavy/Sour 1,050 kbpd PADD I Demand Light/Sweet Heavy/Sour Load Terminal Offload Terminal Shale Play Oil Sands Play Sources: EIA, Various Industry Sources, PLG analysis (Google Earth) 7,650 kbpd PADD III Demand Light/Sweet Heavy/Sour 14
  15. 15. The Importance of Price Differentials to Crude by Rail »  Differentials made rail attractive §  Bakken and WTI trading at ~$12-$15/bbl less than 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, Anacortes, WA, Ferndale, WA) »  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, PLG Analysis 15
  16. 16. Correlation of Operating Rig Count with Sand and Crude Shipments 200,000 2,500 Operating On Shore Rigs All Sand Carloads Handled 180,000 Petroleum Carloads Handled 2,000 140,000 Carloads 120,000 1,500 100,000 80,000 1,000 60,000 40,000 Operating Onshore Rigs 160,000 500 20,000 0 0 2007 Avg. 2008 STCC 14413 (sand) and 13111 (petroleum) Avg. 2009 2010 Source: US Rail Desktop, Baker Hughes, STB data 2011 2012 2013 16
  17. 17. All Crude Handled by Railroad Volume Growth 90,000 80,000 70,000 Carloads 60,000 BNSF 50,000 UP CPRS 40,000 NS CSXT 30,000 CN KCS 20,000 10,000 0 Quarterly Data STCC 13111 Source: US Rail Desktop 17
  18. 18. Shale Related Rail Traffic Still Small Relative to Coal Volumes Railcars Handled: Sand, Crude, & Coal 2,500,000 Carloads 2,000,000 1,500,000 Sand 1,000,000 Crude Coal 500,000 2013 2012 2011 2010 2009 2008 0 Sand Crude Coal Quarterly Data STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop 18
  19. 19. Coal, Crude & Sand Trends: Carloads and Revenue Revenue $18 9 $16 8 7 $14 1,400 Thousands 10 Billions Millions Carloads Combined Sand and Crude Carloads and Revenue 1,200 Crude Revenue $4.5 $4.0 $3.5 1,000 $12 6 Sand Billions Total Coal Carloads and Revenue $3.0 $10 800 $2.5 $8 600 $2.0 5 4 3 2 1 - STCC 14413 (sand), 13111 (petroleum), 11212 (coal) $6 $1.5 400 $4 $2 $0 Source: US Rail Desktop $1.0 200 - $0.5 $0.0 19
  20. 20. Forecast of Crude Railcar Supply and Demand »  Production increases vs. railcar capacity increases §  §  Significant increase in railcar capacity with the large railcar backlog If pipelines and local refining can consume production increases in Permian and Eagle Ford, crude by rail will be primarily Bakken and Canadian Oil Sands-driven »  Under best-case scenario for rail market share capture, data suggests existing & planned tank car fleet exceeds demand Assumptions: •  Bakken: 80% rail market share of Bakken’s projected volumes •  Western Canadian Oil Sands: CAPP projected rail load out capacity due online by 2014 (300K bbl/day) and multiply by two for capacity due online by 2015 and assume 80% CBR utilization. •  30,000 crude railcars in March and build rate of 21,500 railcars/year through Q3-2015 with attrition rate of 3,000 railcars/ year •  650 bbl. average railcar capacity and average 23 day turn •  Other production sources increase at rate of 2% per quarter Sources: CAPP, AAR, NDPA, GATX, and PLG analysis »  Possible retrofit of “old design” railcars could dramatically decrease capacity §  Approx. 2/3 of unlined, 30K/gallon fleet would need retrofit 20
  21. 21. Lac Megantic Incident is Changing Crude by Rail »  As with other major rail accidents, expect lasting impact »  Increased product testing, documentation and traceability (FRA directive) §  Oil chemistry varies by well/pad §  Concerns with extremely low flash and boiling points §  Flammable liquids/crudes likely will require new design tank cars »  Increased FRA audit and scrutiny of entire CBR supply chain »  Railroad operating rule changes on hazmat train handling §  OT 55 expanded to include all trains transporting hazmats »  Increased scrutiny, insurance requirements §  Short line and regional railroads in particular §  May have consequences in CBR freight rates 21
  22. 22. Shale Development and Crude By Rail: Current Market Dynamics »  Adverse 3Q 2013 market forces have reversed §  WTI-Brent spread now ~$12/bbl »  CBR rebound driven by Bakken to coasts §  Long-term outlook for Bakken CBR to USGC is weak §  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 –  ~600 bbl/day capacity planned §  NOT like the Bakken/less certainty –  –  –  Heavy/sour product requires significant additional capex Fewer destinations 3-4 year runway until significant new pipeline capacity is added §  Tank car market reorienting to coiled/insulated car types Source: RBN Energy 22   22
  23. 23. Light/Sweet Crude Logistics and Price Differentials – November 2013 Rail ANS Pipeline Light/Sweet at PNW Bakken (rail): $94 Brent (ship): $108 Marine $81 (wellhead) Pacific Northwest Refiners PADD V Demand 2,400 kbpd Bakken Clearbrook, MN Light/Sweet at EC Bakken (rail): $96 Brent (ship): $107 Light/Sweet Heavy/Sour Chicago, IL East Coast Refiners California Refiners 1,050 kbpd Brent PADD I Demand Light/Sweet WTI:$95 Heavy/Sour Cushing, OK Permian Spread Brent - WTI LLS - WTI WTI - Bakken (Clearbrook) Dec. 2012 $21.83/bbl $20.00/bbl Nov. 2013 $10.53/bbl $3.90/bbl Change -$11.30/bbl -$16.10/bbl $3.00/bbl $16.00/bbl St. James, LA Light/Sweet at LA GC Bakken (rail): $96 LLS (local): $99 $13.00/bbl Crude Prices from November 2013 Sources: EIA, PAALP, CIBC, CME Group, PLG analysis (Google Earth) TX Gulf Coast Eagle Ford Refiners Light/Sweet at TX GC Bakken (pipe): $92 Brent (ship): $107 WTI (pipe): $100 LA Gulf Coast Refiners 7,650 kbpd PADD III Demand Light/Sweet Heavy/Sour $6 Brent 23
  24. 24. Heavy/Sour Crude Logistics and Price Differentials – November 2013 Rail Oil $56 Sands Pipeline Marine Hardisty, AB Pacific Northwest Refiners PADD V Demand 2,400 kbpd Clearbrook, MN Light/Sweet Heavy/Sour PADD II Demand California Refiners 3,250 kbpd Chicago, IL Light/Sweet Heavy/Sour Midwest Refiners Spread Mexican Maya - WCS Dec. 2012 $33.55/bbl Crude Prices from November 2013 Sources: EIA, CME Group, CIBC, PLG analysis (Google Earth) Nov. 2013 $30.82/bbl Change -$2.73/bbl Heavy/Sour at TX GC Mexican Maya (ship): $86 WCS (pipe): $74 WCS (rail): $80 TX Gulf Coast Refiners 7,650 kbpd Mexican Maya PADD III Demand Light/Sweet Heavy/Sour 24
  25. 25. Looking Ahead: Crude By Rail SWOT »  Primary strengths and opportunities Rapid implementation, scale up of operations, terminals, transit times Shorter contracts (2-3 year commitments vs. 10 years for pipeline) Access to coastal areas not connected via pipeline Origin/destination flexibility/facilitation of arbitrage opportunities Foundational business (i.e. refining and E&P majors who have made a structural commitment to CBR) §  Growth in Canadian CBR – 3-4 year window §  Longer-term opportunities §  §  §  §  §  –  Future exports of crude –  Refinery conversions in PADD III to process more light/sweet »  Primary threats and weaknesses §  Exposure to changing price differentials that undermines trading business –  Narrow WTI-Brent spread (EIA projects $8/bbl for 2014) –  Adverse benchmark alignment (i.e. WTI-LLS) Supply Sources §  Structural changes in supply Capital Key Drivers Destination Markets Oil Prices –  Glut of Permian and Eagle Ford light sweet oil displacing rail volumes to USGC –  Water-borne Eagle Ford crude deliveries to USEC §  Continued pipeline development §  Adverse commercial consequences from recent accidents 25   25
  26. 26. Looking Ahead: Crude Oil Anticipated Production Growth and Product Flows 1,985 2,590 Oil Sands Export Terminal Heavy/Sour Light/Sweet +30% Rail Pipeline Marine Hardisty, AB Pacific Northwest Refiners Bakken 929 1,363 Canadian East Coast Refiners +47% Clearbrook, MN Chicago, IL California Refiners East Coast Refiners Cushing, OK +26% Anticipated Production Growth (000 bbl/d) = Current 2013 = Future 2017 1,337 1,680 Permian +35% 1,184 Eagle Ford St. James, LA 1,600 LA Gulf Coast Refiners TX Gulf Coast Refiners Sources: EIA, BENTEK Energy, CAPP, Railroad Commission of Texas, ND Pipeline Association, PLG Analysis (Google Earth) 26
  27. 27. Professional Logistics Group Thank You! For follow up questions and information, please contact PLG: +1-312-957-7757 / info@prologisticsgroup.com Taylor Robinson, President Graham Brisben, CEO Jean Arndt, Senior Project Manager Jeff Dowdell, Senior Consultant Gordon Heisler, Senior Consultant Jeff Rasmussen, Senior Consultant Jay Olberding, Analyst This presentation is available at: WWW.PLGCONSULTING.COM 27

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