PLG Rail Equipment Finance Presentation March 2014

Logistics Engineering SupplyChain
Shale Development:
The Evolving
Transportation
Impacts
Prepared for:
March 3, 2014
Rail Equipment Finance
Conference 2013

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
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
2010 onward 2016 onward

4
Frac sand: Resurgent growth?
-
Denouement of coal?
-
Is “reshoring” real?
-
Crude by rail:
Is it safe?
Here to stay?
Burning Questions

5
Correlation of Operating Rig Count with Sand and Crude Shipments
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
U.S. Frac Sand IndustryTrends
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
Sand Railcar Market Conditions
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
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
Source: EIA, February 2014

9
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
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
* *
*

10
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

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
WTI & Henry Hub Natural Gas Energy Equivalent Pricing
Source: EIA, February 2014
~5X
Source: International Energy Agency, October 2013 *estimate

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
Source: Townsend Solutions, December 2013
Source: IHS Chemical, September 2013
Source: American Chemicals Council, February 2014

13
Shale Gas Driving Steel, Methanol, & Fertilizer Manufacturing in US
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
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
Source: RBN Energy

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
The Importance of Price Differentials to Crude by Rail
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
Source: AAR, North Dakota Pipeline Association, Surface Transportation Board, PLG Analysis, February 2014
Crude by Rail Statistics
-
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
*
WTI-Brent
equilibrium
3Q3012
WTI-Brent
equilibrium
3Q3013

18
Shale Development and Crude By Rail: Current Market Dynamics
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
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
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
Forecast of Light Crude Railcar Supply and Demand
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
High Profile Accidents Changing Crude by Rail
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
Bakken Crude HigherVolatility
Click image to watch video

24
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 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

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

PLG Rail Equipment Finance Presentation March 2014

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to PLG Rail Equipment Finance Presentation March 2014

Similar to PLG Rail Equipment Finance Presentation March 2014 (20)

More from PLG Consulting

More from PLG Consulting (20)

Recently uploaded

Recently uploaded (20)

PLG Rail Equipment Finance Presentation March 2014