PLG

1. Logistics
Engineering
Supply
Chain
The
North
American
Energy
Revolution:
Implications
for
Rail
Prepared
for:
Railway
Supply
Group
Graham
Brisben
CEO,
PLG
Consulting
February
20,
2015

2. 2
Boutique
consulting
firm
with
team
members
throughout
North
America
§ Established
in
2001
§ Over
100
clients
and
250
engagements
Practice
Areas
§ Logistics
§ Engineering
§ Supply
Chain
Consulting
services
§ Strategy
&
optimization
§ Logistics
assets
&
infrastructure
development
§ Supply
Chain
design
&
operationalization
§ M&A/investments/private
equity
Industry
verticals
§ Energy
§ Bulk
commodities
§ Freight
rail
§ Institutional
investors
and
private
equity
About
PLG
Consulting
The
North
American
Energy
Revolution:
Implications
for
Rail
Partial
Client
List

3. 3
Deep
rail
industry
experience
• Operational
• Commercial
• Design
&
engineering
• Equipment
market
Broad
shale
development
industry
client
experience
over
past
four
years
• E&P
companies
• Refiners
• Terminal
developers
• Investors
–
private
equity,
hedge
funds,
investment
banks
• Government
agencies,
industry
trade
groups
• Equipment
leasing
PLG’s
Industry
Qualifications
Diverse
projects
• Frac
sand
supply
chain
design
&
implementation
• CBR
supply
chain
optimization
• Rail
commercial
negotiations
• Rail
car
acquisition
–
commercial
&
technical
inspection
• Comprehensive
design
&
engineering
–
rail,
marine,
tankage,
product
handling,
and
related
facilities
• EH&S
training
• Investment
advising
• Industry’s
only
long
term,
CBR
volume
forecast
with
complimentary
rail
tank
car
forecast
Recognized
industry
thought
leader
on
CBR
and
tank
car
markets
• Numerous
industry
presentations,
articles
and
advising
The
North
American
Energy
Revolution:
Implications
for
Rail

4. 4
s
s
Source:
CAPP,
About
Oil
Sands
Source:
EIA,
May
2014
US
Shale
Unconventional
Energy
Resources
and
Extraction
Technologies
The
North
American
Energy
Revolution:
Implications
for
Rail
Western
Canadian
(WC)
Oil
Sands
Source:
www.epmag.com
SAGD
Horizontal
Drilling
&
Hydraulic
Fracturing
Source:
Marathon,
February
2014
“Moore’s
Law”
at
play:
Exponential
advances
in
technology,
resulting
in
Declining
costs
Surging
production

5. 5
• New
extraction
technologies
resulting
in
record
production
of
gas,
natural
gas
liquids
(NGL),
and
crude
oil
• Water-­‐borne
imports
of
crude
being
displaced
by
domestic
production
• North
America
on
pace
toward
full
“energy
independence”
by
2020
The
North
American
Energy
Revolution
The
North
American
Energy
Revolution:
Implications
for
Rail
Source:
CAPP
Report,
June
2014
Source:
RBN
Energy,
December
2014

6. 6
Correlation
of
Operating
Rig
Count
With
Sand
&
Crude
Carloads
Handled
The
North
American
Energy
Revolution:
Implications
for
Rail
0
200
400
600
800
1,000
1,200
1,400
1,600
0
50,000
100,000
150,000
200,000
250,000
Operating
U.S.
Land
Oil
Rigs
Carloads
Handled
U.S.
Land
Oil
Rigs
All
Sand
Carloads
Petroleum
Carloads

7. 7
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
are
key
• 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)
Historical
U.S.
Crude-­‐by-­‐Rail
Growth
0
200
400
600
800
1,000
1,200
2010-­‐Q1
2010-­‐Q2
2010-­‐Q3
2010-­‐Q4
2011-­‐Q1
2011-­‐Q2
2011-­‐Q3
2011-­‐Q4
2012-­‐Q1
2012-­‐Q2
2012-­‐Q3
2012-­‐Q4
2013-­‐Q1
2013-­‐Q2
2013-­‐Q3
2013-­‐Q4
2014-­‐Q1
2014-­‐Q2
2014-­‐Q3
2014
Oct
2014
Nov
U.S. Crude by Rail Volumes (kbpd)
US Crude Originations Bakken Crude Originations
0
200
400
600
800
1,000
1,200
1,400
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
US Bakken Basin Crude Production and Rail
Transport (kbpd)
Production Crude by Rail
Source: NDPA, PLG Analysis, February 2015
The
North
American
Energy
Revolution:
Implications
for
Rail

8. 8
2014:
Oversupply
Has
Caused
Precipitous
Price
Declines
Source:
RBN
Energy,
January
2015
WTI,
Brent
&
Natural
Gas
2014
and
2015
Citibank
cut
its
crude
price
forecasts,
saying
West
Texas
Intermediate
(WTI)
could
go
as
low
as
the
$20
per
barrel
range
before
recovering
to
reach
a
new
equilibrium.
(Reuters,
2/09/2015)
The
market
doesn’t
understand
just
how
quickly
oil
companies
are
scaling
back
their
activities,
and
as
a
result,
oil
prices
could
rebound
faster
than
many
observers
expect.
-­‐
Continental
Resources
CEO
Harold
Hamm
(Fuelfix,
1/28/2015)
• U.S.
shale
oil
industry
has
now
entered
uncharted
territories
in
its
brief
history
• Natural
Gas
and
NGL
pricing
has
also
dropped
dramatically
in
a
similar
timeframe…due
to
oversupply
and
NGL
ties
to
oil
prices
• Market
experts
have
widely
varied
opinions
on
what
the
rest
of
the
year
holds
for
pricing
-­‐
$10
~
$70
per
barrel…
The
North
American
Energy
Revolution:
Implications
for
Rail

9. 9
Source:
Baker
Hughes,
February
2015
…Shale
Oil
Rigs
Are
Falling
Quickly…
• Producers
have
taken
the
following
measures:
• Slashed
their
CAPEX
by
30-­‐50%+
for
2015
• Stopped
drilling
exploratory
wells
• Focus
drilling
on
known
“sweet
spots”
• Requesting
suppliers
for
price
reductions
up
to
30%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
U.S.
Land
Oil
Rigs
The
North
American
Energy
Revolution:
Implications
for
Rail
• Will
continue
to
drill
“held
by
production”
wells
to
maintain
land
assets
–
but
no
production
• Conversely,
Canadian
oil
sands
producers
are
completing
in-­‐process
wells
as
they
already
have
significant
investments
made

10. 10
…However,
Crude
Oil
Production
Will
Continue
To
Grow
0
1
2
3
4
5
6
7
8
9
Lower
48
States
(excl
GOM)
Crude
Oil
Production
(MMBPD),
Includes
Lease
Condensate
Source:
EIA,
February
2015
Source:
CAPP,
January
2015
• ~$50
WTI
price
is
very
challenging
for
all
producers
right
now
• Cost
reduction
focus
and
“sweet
spot”
drilling
will
continue
to
lower
break
even
cost
• Smaller,
weaker
players
will
fall
while
stronger
producers
will
actually
grow
during
downturn
• Oil
sands
has
a
20-­‐50
year
view
on
projects
• Have
also
cut
R&D
budgets
and
delayed
new
greenfield
projects
• SAGD
wells
also
has
lower
break
even
costs
compared
to
shale
wells
• Current
pricing
is
a
short
term
issue
from
their
perspective
The
North
American
Energy
Revolution:
Implications
for
Rail

11. 11
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
Impacts
to-­‐date
include:
Dramatic
reduction
in
crude
imports,
lower
electricity
costs,
lower
gasoline
prices,
increased
refined
products
exports
The
next
wave:
Manufacturing
renaissance
in
the
US
based
on
abundant,
low
cost
energy
and
feedstocks
The
North
American
Energy
Revolution:
Implications
for
Rail

12. 12
Over
$120B
of
New
Shale-­‐Related
Manufacturing
Investments
Have
Been
Announced
The
North
American
Energy
Revolution:
Implications
for
Rail
Ethylene
and
Propylene
Ammonia
and
Derivatives
Methanol
Polymers
and
Resins
Chlor-­‐alkali
Other
Source:
American
Chemistry
Council
and
PLG
analysis

13. 13
Small
Covered
Hoppers
–
Market
Update
Current
market
is
one
of
“mixed
signals”
§ Significant
activity
in
short-­‐term
subleasing
and
railcar
storage
§
Some
shifting
of
new-­‐build
delivery
schedules
§ Minimal
outright
cancellations
of
car
orders
§
“Mixed
signals”
should
be
expected
due
to
oil
price
volatility
and
continual
revisions
to
2015
well
completion
plans
Availability
positions
are
showing
some
“cracks”
§ A
few
late-­‐2015
new-­‐build
slots
are
available
§ New-­‐build
production
schedules
are
full
through
mid-­‐2016….for
now
§ Overriding
attitude
for
2016
production
is
“wait
and
see”
Typical
full
service
lease
rates
are
currently
$650
-­‐
$675,
down
from
late
Q3
2014
(was
over
$700)
Frac
sand
shippers/receivers
will
continue
to
move
towards
more
efficient
methods
of
rail
transportation,
especially
with
heightened
pressure
on
frac
sand
delivered
cost
per
ton
Cement
consumption
is
expected
to
grow
by
8%+
in
2015
§ Cement
railcar
lessees
are
carefully
watching
the
market
for
lease
opportunities
Plastic
pellet
cars
are
successfully
competing
for
small
hopper
build
capacity
The
North
American
Energy
Revolution:
Implications
for
Rail

14. 14
Low
Oil
Price
Case
North
American
CBR
Forecast
Overview
The
North
American
Energy
Revolution:
Implications
for
Rail
Source: PLG Crude by
Rail & Tank Car
Forecast, Feb. 2015
• Bakken
&
Oil
Sands
are
main
drivers
of
CBR
volumes,
accounting
for
~87%
of
NA
movements
in
2017
• Other
plays
such
as
Niobrara
and
Permian
are
seeing
increasing
CBR
activity
but
will
be
adequately
served
by
pipelines
long-­‐term
-
100
200
300
400
500
600
700
800
900
2013 2014 2015 2016 2017 2018 2019
Scenario 3 WTI $52-64 & WCS $40-52 Crude by Rail Volumes
Bakken
Western Canada
Niobrara
Permian

15. 15
Industry
Awaiting
U.S.
DOT
PHMSA
Decision
–
May
2015
NPRM
(July
2014)
addressed
following
key
areas:
§ Classification
&
characterization
of
mined
gases
and
liquids
§ Rail
routing
risk
assessment
§ Reduced
operating
speeds
§ Enhanced
braking
§ Three
tank
car
options
announced
for
HHFT
trains
–
Option
2
(9/16”
tank,
no
enhanced
braking)
is
likely
the
new
standard
Recent
accidents
continue
to
put
pressure
on
increasing
tank
car
safety
specifications
Rail
tank
car
market
conditions
§ New-­‐build
backlog
is
20-­‐24
months
and
most/all
orders
have
“no
cancellation”
clauses
§ New
order
active
on
“pause”
till
new
rules
announced
in
May
§ Some
orders
for
9/16”
cars
already
on
order
books
§ Current
lease
price
~$1,900
/
month
§ Spot
market
rate
is
~$1,000/month
or
lower,
very
soft
market
§ Numerous
crude
oil
sets
are
in
storage,
leading
to
improved
operations
and
availability
of
power
which
was
in
short
supply
§ Industry
in
a
holding
pattern
-­‐
general
sentiment
is
“wait
and
see”
Tank
Car
Insulation
Top
Fittings
Housing
Manway
Tank
Jacket
Tank
Shell
Tank
Head
Head
Shield
Source:
API
with
PLG
simplification
Bottom
Outlet
Valve/
Protection
Skid
The
North
American
Energy
Revolution:
Implications
for
Rail

16. 16
Total
Tank
Car
Fleet
Forecast
Under
NPRM
Option
2
and
~$58/bbl
Oil
The
North
American
Energy
Revolution:
Implications
for
Rail
CRUDE
45,644
13%
ETHANOL
26,920
7%
LPG
20,683
6%
CHEMICAL
158,424
43%
AG
76,579
21%
OTHER
36,595
10%
2015
CRUDE
32,277
8%
ETHANOL
26,795
6%
LPG
21,571
5%
CHEMICAL
168,269
40%
AG
79,864
19%
OTHER
40,566
10%
SURPLUS
CRUDE
13,955
3%
SUBJECT
TO
RETIREMENT,
STORAGE,
OR
RESTRICTED
USE
DUE
TO
REGULATION
40,100
9%
2019
Total
Fleet:364,847
Total
Fleet:
423,396

17. Logistics
Engineering
Supply
Chain
Thank
You
!
For
follow
up
questions
and
information,
please
contact:
Taylor
Robinson,
President
+1
(508)
982-­‐1319
/
trobinson@plgconsulting.com
This
presentation
is
available
for
download
at:
http://plgconsulting.com/category/presentations/