Logistics Engineering SupplyChain
Shale Development:
The Evolving
Transportation
Impacts
Prepared for:
March 3, 2014
Rail ...
2
Boutique consulting firm with team members
throughout North America
 Established in 2001
 Over 90 clients and 250 enga...
3
Shale Supply Chain and Downstream Impacts
Feedstock (Ethane)
Byproduct
(Condensate)
Home Heating
(Propane)
Other Fuels
O...
4
Frac sand: Resurgent growth?
-
Denouement of coal?
-
Is “reshoring” real?
-
Crude by rail:
Is it safe?
Here to stay?
Bur...
5
Correlation of Operating Rig Count with Sand and Crude Shipments
Shale Development: The Evolving Transportation Impacts
...
6
U.S. Frac Sand IndustryTrends
Shale Development: The Evolving Transportation Impacts
Sand
33%
Rail - Freight, FSC
and Eq...
7
Sand Railcar Market Conditions
Shale Development: The Evolving Transportation Impacts
Small Covered Hoppers
 Current ma...
8
Natural gas now supplying 27% of U.S.
Electricity Generation
 US coal electricity generation share capture has
dropped ...
9
Shale Related RailTraffic Still Small Relative to CoalVolumes
Shale Development: The Evolving Transportation Impacts
0
5...
10
Coal, Crude & SandTrends: Carloads and Revenue
Shale Development: The Evolving Transportation Impacts
$0
$2
$4
$6
$8
$1...
11
Natural gas has recently been ~5X cheaper
than oil on a BTU-basis
 Innovation will convert more transportation fuels a...
12
US Ethane has significant structural cost
advantage vs. Europe and Asia
 Europe andAsia petrochemical plants utilize o...
13
Shale Gas Driving Steel, Methanol, & Fertilizer Manufacturing in US
Shale Development: The Evolving Transportation Impa...
14
US gas demand will grow due
to:
 Coal-fired generation plant
converting to gas
 More industrial use – steel, fertiliz...
15Shale Development: The Evolving Transportation Impacts
Source: American Chemistry Council, February 2014
>$100B of Chemi...
16
The Importance of Price Differentials to Crude by Rail
Shale Development: The Evolving Transportation Impacts
Different...
17
Source: AAR, North Dakota Pipeline Association, Surface Transportation Board, PLG Analysis, February 2014
Crude by Rail...
18
Shale Development and Crude By Rail: Current Market Dynamics
Shale Development: The Evolving Transportation Impacts
Adv...
19
Bakken
Permian
Eagle Ford
Niobrara East Coast
Refiners
Pacific Northwest
Refiners
California
Refiners
TX Gulf Coast
Ref...
20
Oil
Sands
Hardisty,AB
$76
Heavy/Sour at TX GC
Mexican Maya (ship): $91
WCS (pipe): $94
WCS (rail): $100
Sources: EIA, C...
21
Forecast of Light Crude Railcar Supply and Demand
Shale Development: The Evolving Transportation Impacts
Light crude pr...
22
High Profile Accidents Changing Crude by Rail
Shale Development: The Evolving Transportation Impacts
Rail industry has ...
23
Bakken Crude HigherVolatility
Shale Development: The Evolving Transportation Impacts
Click image to watch video
24
Looking Ahead: Crude By Rail SWOT
Shale Development: The Evolving Transportation Impacts
Primary strengths and opportun...
Logistics Engineering SupplyChain
Questions?
-
ThankYou !
For follow up questions and information,
please contact:
Graham ...
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PLG Rail Equipment Finance Presentation March 2014

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Shale Development: The Evolving Transportation Impacts

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PLG Rail Equipment Finance Presentation March 2014

  1. 1. Logistics Engineering SupplyChain Shale Development: The Evolving Transportation Impacts Prepared for: March 3, 2014 Rail Equipment Finance Conference 2013
  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  Private Equity About PLG Consulting Shale Development: The Evolving Transportation Impacts Partial Client List
  3. 3. 3 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 DEMAND ON RAIL CARS Shale Development: The Evolving Transportation Impacts 2010 onward 2016 onward
  4. 4. 4 Frac sand: Resurgent growth? - Denouement of coal? - Is “reshoring” real? - Crude by rail: Is it safe? Here to stay? Burning Questions Shale Development: The Evolving Transportation Impacts
  5. 5. 5 Correlation of Operating Rig Count with Sand and Crude Shipments Shale Development: The Evolving Transportation Impacts STCC 14413 (sand) and 13111 (petroleum) Source: US Rail Desktop, Baker Hughes, Surface Transportation Board, PLG Analysis, February 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 OperatingOnshoreRigs Carloads Operating On Shore Rigs All Sand Carloads Petroleum Carloads * Q4 2014 UP carloads estimated * *
  6. 6. 6 U.S. Frac Sand IndustryTrends Shale Development: The Evolving Transportation Impacts Sand 33% Rail - Freight, FSC and Eqp Lease 42% Destination Transload & Trucking 25% Total Delivered Cost 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 • Ownership shifting supply chain responsibilities – reduced tasks by end customer • 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 • 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
  7. 7. 7 Sand Railcar Market Conditions Shale Development: The Evolving Transportation Impacts Small Covered Hoppers  Current market described as “high demand,” “red hot” by leasing companies  Increased frac sand per well demand, surging liquids production  Additional sand sources opening in Wisconsin  New orders from cement shippers  Best availability is May/June 2014 (limited)  Most likely availability is August-October 2014  Typical full service lease rates $535 - $575  5-7 year leases  Less than 75,000 mileage caps  Frac sand shippers/receivers will continue to move towards more efficient methods of rail transportation  Manifest shipments require 2X the number of railcars vs. unit trains due to increased cycle times  Use of manifest service usually encourages use of railcar as storage at destination, further increasing fleet requirements  Cement consumption is expected to grow by 6.4% in 2014 and 6.2% in 2015, encouraging railcar orders Proppant Consumed byVolume Freedonia Group Analysis 8/13
  8. 8. 8 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  Environmental regulations of coal burning  Scheduled coal unit retirements; 55GW through 2020 Natural Gas Displacement of Coal forThermal Generation Shale Development: The Evolving Transportation Impacts Source: EIA, February 2014
  9. 9. 9 Shale Related RailTraffic Still Small Relative to CoalVolumes Shale Development: The Evolving Transportation Impacts 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 2008 2009 2010 2011 2012 2013 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, February 2014 * Q4 2014 UP carloads estimated * * *
  10. 10. 10 Coal, Crude & SandTrends: Carloads and Revenue Shale Development: The Evolving Transportation Impacts $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
  11. 11. 11 Natural gas has recently been ~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  Electricity costs 2x higher in China, 8x higher in Europe US gas downstream products will have world class competitiveness - are the “building blocks of manufacturing”  Chemicals  Resins Natural gas is a cleaner burning fuel compared to other hydrocarbons (coal, oil) Shale Gas Is More Important to US Industry CompetitivenessThan Oil Shale Development: The Evolving Transportation Impacts WTI & Henry Hub Natural Gas Energy Equivalent Pricing Source: EIA, February 2014 ~5X Source: International Energy Agency, October 2013 *estimate
  12. 12. 12 US Ethane has significant structural cost advantage vs. Europe and Asia  Europe andAsia petrochemical plants utilize oil-based Naphtha as their feedstock  Domestic ethane supplies to quadruple by 2025  Prices at historic lows NGLs (especially ethane) are basic building blocks in chemical supply chain Low Cost NGLsWill Give US LongTerm Material Cost Advantages Shale Development: The Evolving Transportation Impacts Source: Townsend Solutions, December 2013 Source: IHS Chemical, September 2013 Source: American Chemicals Council, February 2014
  13. 13. 13 Shale Gas Driving Steel, Methanol, & Fertilizer Manufacturing in US Shale Development: The Evolving Transportation Impacts Shale gas boom makes direct-reduced iron steel economical  DRI process uses natural gas in place of coal to produce iron  $2+B in new US projects announced  DRI-derived steel of higher quality than that created from recycled scrap, further driving demand Opportunity in U.S. methanol production  Capture price spread between low-cost natural gas and methanol  Methanol is a very cost-efficient way to move natural gas to higher-value foreign markets  US represents 10% of the global market  U.S. imports 89% of its supply on average Natural gas is a feedstock for ammonia production  Represents ~70% of cash costs (CF Industries)  12MM mt new domestic manufacturing capacity announced Source: GE Capital presentation, November 2013 Source: IHS Energy, September 2013
  14. 14. 14 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  30+ year supply at ~$4 mm/btu; cost of production decreasing  Supply will overwhelm demand as prices approach $5 mm/btu  US government will likely limit LNG export to protect US from world gas market price  Industrial use will represent only ~1/3 of 2020 production (75B cf/d) US Shale Gas Background and Future Shale Development: The Evolving Transportation Impacts Source: RBN Energy
  15. 15. 15Shale Development: The Evolving Transportation Impacts Source: American Chemistry Council, February 2014 >$100B of Chemical Expansion Announced 2008 2010 2012 2014 2016 2018 2020 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 and new US factories being built Phase II – Downstream products require significant processing facilities investment and lead time Phase III – About 65% of the cost of manufactured product is material cost; US material cost advantage will enable more traditional manufacturing to return to the US from low cost labor countries SHALE GAS BOOM Shale Gas Phased ImpactTo US Industrial Renaissance
  16. 16. 16 The Importance of Price Differentials to Crude by Rail Shale Development: The Evolving Transportation Impacts Differentials made rail attractive  Bakken andWTI 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 byApril 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, Feb. 2014 Source: North Dakota Pipeline Authority, January 2014, PLG Analysis
  17. 17. 17 Source: AAR, North Dakota Pipeline Association, Surface Transportation Board, PLG Analysis, February 2014 Crude by Rail Statistics Shale Development: The Evolving Transportation Impacts - 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 - 50,000 100,000 150,000 200,000 250,000 300,000 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 Petroleum & Petroleum Products (carloads/quarter) Crude Originated (carloads/quarter) Williston Crude by Rail (bbls/day) Carloads/Quarter Bbls/Day * * Q4 2014 UP carloads estimated WTI-Brent equilibrium 3Q3012 WTI-Brent equilibrium 3Q3013
  18. 18. 18 Shale Development and Crude By Rail: Current Market Dynamics Shale Development: The Evolving Transportation Impacts Adverse 3Q 2013 market forces have reversed  WTI-Brent spread now ~$9/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  ~800 bbl/day planned AB loading capacity through 2015 = 25% of production  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: RBN Energy, February 2014 Brent vs. WTI Spread Source: Y Charts, February 2014
  19. 19. 19 Bakken Permian Eagle Ford Niobrara East Coast Refiners Pacific Northwest Refiners California Refiners TX Gulf Coast Refiners LA Gulf Coast Refiners Light/Sweet at TX GC Bakken (pipe): $101 Brent (ship): $111 WTI (pipe): $105 Light/Sweet at PNW Bakken (rail): $103 Brent (ship): $112 Light/Sweet at EC Bakken (rail): $105 Brent (ship): $111 Light/Sweet at LA GC Bakken (rail): $105 LLS (local): $106 Brent ANS Brent Sources: EIA, PAALP, CIBC, CME Group, PLG analysis (Google Earth) PADD I Demand 2,525 kbpd PADD III Demand 8,150 kbpd PADDV Demand 1,075 kbpd Light/Sweet Heavy/Sour Light/Sweet Heavy/Sour Light/Sweet Heavy/Sour $90 (wellhead) WTI:$100 Marine Rail Pipeline Cushing, OK Chicago, IL Clearbrook, MN St. James, LA $6 Spread Feb. 2014 CBR Impact Brent - WTI $8.58/bbl + LLS - WTI $5.41/bbl = WTI - Bakken (Clearbrook) $4.09/bbl = Light/Sweet Crude Logistics and Price Differentials and CBR Impact (+ - = ) – February 2014
  20. 20. 20 Oil Sands Hardisty,AB $76 Heavy/Sour at TX GC Mexican Maya (ship): $91 WCS (pipe): $94 WCS (rail): $100 Sources: EIA, CME Group, CIBC, 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 Feb. 2014 Change Mexican Maya - WCS $38.07/bbl $15.45/bbl -$22.62/bbl Heavy/Sour Crude Logistics and Price Differentials – February 2014
  21. 21. 21 Forecast of Light Crude Railcar Supply and Demand Shale Development: The Evolving Transportation Impacts Light crude production increases vs. general purpose 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, light crude by rail (non Oil-Sands) will be primarilyWilliston Basin (Bakken) Under best-case scenario for rail market share capture, data suggests existing & planned general purpose tank car (light crude) fleet exceeds demand Possible retrofit of “old design” railcars could dramatically decrease capacity  Approx. 2/3 of unlined, 30K/gallon fleet would need retrofit Sources: CAPP, AAR, NDPA, Various Industry Sources and PLG analysis, February 2014 Assumptions: • Williston: 80% rail market share of Williston’s projected volumes • 39,000 tank cars in crude service for light crude in February and build rate of 12,000 railcars/year of tank cars for light crude service through end of 2015 with attrition rate of 2,500 railcars/year • 700 bbl. average railcar capacity and average 23 day turn • Other production sources increase at rate of 16% per year
  22. 22. 22 High Profile Accidents Changing Crude by Rail Shale Development: The Evolving Transportation Impacts Rail industry has a strong safety record, but optics of CBR accidents are overwhelming any positive statistics 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
  23. 23. 23 Bakken Crude HigherVolatility Shale Development: The Evolving Transportation Impacts Click image to watch video
  24. 24. 24 Looking Ahead: Crude By Rail SWOT Shale Development: The Evolving Transportation Impacts 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 toCBR)  Growth in Canadian CBR Primary threats and weaknesses  Exposure to changing price differentials  Narrow WTI-Brent spread (EIA projects $11-12/bbl for 2014)  Adverse benchmark alignment (i.e. WTI-LLS; now ~$5 differential)  Impacts to Brent beyond US control (geopolitical events, global demand)  Structural changes in supply  Permian and Eagle Ford supply to USGC  Water-borne Eagle Ford crude deliveries to USEC  Continued pipeline development  Adverse commercial consequences from recent accidents, i.e. unreasonable timeline for tank car retrofits  Oversupply resulting in crude prices at <$75/bbl Supply Sources Oil Prices Destination Markets Capital KEY DRIVERS
  25. 25. Logistics Engineering SupplyChain Questions? - ThankYou ! For follow up questions and information, please contact: Graham Brisben, CEO +1 (708) 386-0700 / gbrisben@plgconsulting.com Taylor Robinson, President +1 (508) 982-1319 / trobinson@plgconsulting.com

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