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This document provides an overview of PLG Consulting, a logistics and supply chain consulting firm, and discusses the implications of the North American energy revolution for the rail industry. PLG Consulting has over a decade of experience in logistics, engineering, and supply chain consulting for over 200 clients in bulk logistics, freight rail, energy, chemicals, and private equity. The document summarizes the growth of unconventional oil and gas extraction from US shale and Canadian oil sands due to new technologies, leading to surging domestic production and declining imports to North America. This energy boom has significant implications for growing crude by rail transportation on the continent.

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Logistics         Engineering         Supply  Chain         The  North  American   Energy  Revolution:     Implications  for  Rail     Prepared  for:   Rail  Equipment  Finance  Conference  2015       Graham  Brisben   CEO,  PLG  Consulting     March  2,  2015  
2   Experience     §  Delivering  value  to  over   200  clients  since  2001   §  Real-­‐world,  industry   veterans     §  Logistics,  engineering  &   supply  chain  experts  with   operational  experience   Core  Expertise   §  Bulk  Logistics     §  Freight  Rail   §  Energy  &    Chemical   Markets   §  Private  Equity  and   Corporate  Development     About  PLG  Consulting   Partial  Client  List   Services     §  Diagnostic  assessments  &   optimization   §  Logistics  Infrastructure   design   §  Supply  chain  design  &   operational  improvement   §  Investment  strategy,  target   identification,  due  diligence,   post-­‐transactional  support   §  Crude  by  rail  (CBR)  and  rail   tank  car  (RTC)  forecasts   §  Independent  technology   assessment  &   implementation   §  Hazmat  training,  auditing  &     risk  assessment  
3   Deep  rail  industry  experience   §  Operational   §  Commercial     §  Design  &  engineering     §  Equipment  market     Broad  energy  industry  client   experience  over  past  five  years     §  E&P  companies   §  Oilfield  services   §  Refiners   §  Terminal  developers/midstream   §  Investors  –  private  equity,  hedge  funds,   investment  banks   §  Government  agencies,  industry  trade   groups   §  Equipment  manufacturing  &  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   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   Representative  Producer  Gains,  Eagle  Ford   Source:  RBN  Energy,  December  2014  
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   U.S.  Crude  Oil  Production  and  Imports   The  North  American  Energy  Revolution:    Implications  for  Rail   0   2,000   4,000   6,000   8,000   10,000   12,000   1970   1972   1974   1976   1978   1980   1983   1985   1987   1989   1991   1993   1996   1998   2000   2002   2004   2006   2009   2011   2013   U.S.  Crude  Oil  Production  (kbpd)   Source:  EIA,  February  2015   U.S.  crude  oil  production  growth   §  Crude  oil  production  over  9  MMbpd,  up  from  5  MMbpd  in  2008   §  Growth  has  come  primarily  from  shale  oil  production  of  light   crude   §  2015  production  close  to  US  record  of  1970   Decrease  in  crude  oil  imports   §  Shale  crude  has  been  pushing  out  light  crude  imports   §  Heavy  sour  crude  imports  have  been  steady,  with  Canada  growing   to  become  the  primary  US  supplier   §  2/3-­‐1/3  ratio  of  imports  to  domestic  production  has  inverted  since   2005   0   2,000   4,000   6,000   8,000   10,000   12,000   2005   2006   2007   2008   2009   2010   2011   2012   2013   2014   U.S.  Crude  Oil  Imports  (kbpd)   Source:  EIA,  February  2015  
7   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  (2/9/2015)   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  
8   Producer  Rates  of  Return  by  Play  and  Product   The  North  American  Energy  Revolution:    Implications  for  Rail   Source:  RBN  Energy,  February  2015   At  $50/bbl  oil,   producers  mostly  at   or  below  breakeven    
9   …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%     Source:  Baker  Hughes,  February  2015   0   500   1,000   1,500   2,000   U.S.  Land  Oil  Rigs   ~30%  decline  in  onshore  operating  rigs   Conversely,  Canadian  oil  sands  producers  are   completing  in-­‐process  wells  as  they  already   have  significant  investments  made   The  North  American  Energy  Revolution:    Implications  for  Rail  
10   …However,  Crude  Oil  Production  Will  Continue  To  Grow   0   2   4   6   8   10   Lower  48  States  (excl  GOM)  Crude  Oil  Production   (MMBPD),  Includes  Lease  Condensate   Source:  EIA,  February  2015   Source:  CAPP,  January  2015   Cost  reduction  focus  and  “sweet  spot”  drilling  will   continue  to  lower  break  even  cost     Held  by  Production  (HBP)  lease  clauses  will  help   support  production   Smaller,  weaker  players  will  fall  while  stronger   producers  will  actually  grow  during  downturn   Oil  sands  has  a  20-­‐50  year  view  on  projects   R&D  budgets  cut;  new  greenfield  projects  delayed   SAGD  wells  have  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   Crude  Oil  Price  Forecast   The  North  American  Energy  Revolution:    Implications  for  Rail   $0   $10   $20   $30   $40   $50   $60   $70   $80   $90   2015   2016   2017   2018   2019   2020   2025   WTI  (Cushing)  Forecast  Pricing   Source:  Turner  Mason,  February  2015   Crude  oil  prices  forecasted  to   improve  as  supply  contracts,   global  demand  increases  over   several  years     2015  will  be  very  challenging     Return  of  $100/bbl.  oil:    don’t   hold  your  breath     However,  forecasted  price  levels   for  2017  and  beyond  will  sustain   continued  growth  in  production   (and  frac  sand,  CBR)  
12   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   The  North  American  Energy  Revolution:    Implications  for  Rail   The  next  wave:   Manufacturing  renaissance  in  the  US  based  on  abundant,  low  cost   energy  and  feedstocks   Impacts  to-­‐date  include:       Dramatic  reduction  in  crude  imports,  lower  electricity  costs,  lower   gasoline  prices,  increased  refined  products  exports    
13   Downstream  Impacts  –  Railcar  Demand   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   The  North  American  Energy  Revolution:    Implications  for  Rail   Since  2010   2017  onward  
14   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  
15   Frac  Sand  Demand   The  North  American  Energy  Revolution:    Implications  for  Rail   Fracking  technology  changes  drove  major   growth  in  frac  sand  through  2014   §  Nearly  100B  lbs.  in  2014   §  “Fatter”  fracs  drove  increased  well  sand  intensity;  up   to  100  cars  per  well   §  New  demand  for  100  mesh  product;  eastern  MO   emerged  as  a  major  new  supply  area   However,  significant  market  contraction   underway  in  2015   §  “Wind  down”  taking  place  in  shale  plays  with  large   fracking  crew  layoffs;  expect  volume  decreases  up  to   40%   §  Inventories  up,  slower  railcar  velocities   Demand  expected  to  flatten  for  next  two   years   §  Reflects  pullback  in  new  exploration  and  drilling;   decline  in  onshore  rig  count   As  with  last  contraction  (2012),  logistics  becomes   the  main  platform  for  competition   §  Increased  mode  shifts  where  possible  (rail  to  barge)   §  Consolidation  expected  among  producers,  service  providers     Source:    PacWest  ProppantIQ,  December  2014  
16   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”   §  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  
17   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  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   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   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   Source:  NDPA,  STB,  PLG  Analysis,  February  2015  
18   Pipeline  Build-­‐out  Remains  Key  Logistics  Issue  for  Oil  Sands   Current  pipelines  are  at  capacity  with  higher   apportionment  due  to  maintenance  and  expansion   Oil  Sands  pipelines  are  under  intense  scrutiny  and   subject  to  court  challenges  and  protests  in  U.S.  and   Canada   §  NEB  has  extended  its  review  of  Trans  Mountain  expansion  by  7   months;  recent  Canadian  Supreme  Court  ruling  gives  more  power  to   First  Nations  in  land  claims   Innovation  with  existing  pipelines  increasing  capacity   §  Enbridge  has  temporarily  switched  the  flows  of  Alberta  Clipper  and   Line  3  on  17.5-­‐mile  segment  across  the  U.S.-­‐Canadian  border;  will   maximize  the  flows  under  existing  permits  until  the  Department  of   State  review  is  completed  on  expansion     §  Increased  Alberta  Clipper  flows  by  27%  to  570  kbpd  in  September   2014  and  potentially  up  to  800  kbpd  in  2015   Large  Canadian  oil  producers  and  pipeline  companies   are  strategically  investing  in  CBR  for  short  and  long   term  flexibility   Likely  Built  Within  Medium   Term  (~2019)   §  Trans  Mountain  Express   (Kinder  Morgan)   §  Alberta  Clipper  (Enbridge)   §  Keystone  XL  (TransCanada)   Likely  Delayed  Until   2020  or  Later   §  Northern  Gateway   (Enbridge)   §  Energy  East   (TransCanada)   The  North  American  Energy  Revolution:    Implications  for  Rail  
19   NA  Crude  Logistics  Today   Sources:  EIA,  PLG  analysis  (Google  Earth)     Light/Sweet   Heavy/Sour     Pacific   Northwest   Refiners   California   Refiners   2,525   kbpd   PADD  V   Demand   Midwest     Refiners   3,375   kbpd   PADD  II  Demand   East  Coast  Refiners   PADD  I  Demand   1,075   kbpd   LA  Gulf  Coast  Refiners   TX  Gulf  Coast   Refiners   PADD  III     Demand   8,150   kbpd   Eagle  Ford   Permian   Bakken   Rail   Pipeline     Oil  Sands   GOM   The  North  American  Energy  Revolution:    Implications  for  Rail   Light/Sweet   Heavy/Sour    
20   Bakken  Production  and  Takeaway  Share   CBR  share  of  production  expected  to  remain  stable  due  to  the   optionality  it  provides  and  the  lack  of  pipeline  options  to  the  key   markets  on  West  and  East  Coast      -­‐          200      400      600      800      1,000      1,200      1,400      1,600     2014   2015   2016   2017   2018   2019   Bakken  Takeaway  Forecast  (kbpd)   Crude  by  Rail  Forecast   Pipeline  Forecast   Local  Refinery  Forecast   Note:    Based  on  current   $50-­‐55  WTI  price   remaining  constant   Source:  PLG  Crude  by  Rail   &  Tank  Car  Forecast,  Feb.   2015   The  North  American  Energy  Revolution:    Implications  for  Rail  
21    -­‐          500      1,000      1,500      2,000      2,500      3,000      3,500      4,000      4,500      5,000     2014   2015   2016   2017   2018   2019   Western  Canada  Takeaway  Forecast  (kbpd)   CBR  Forecast   Pipeline  Forecast   Local  Refinery  Forecast   Note:    Based  on  current   $50-­‐55  WTI  price   remaining  constant   Western  Canada  Production  and  Takeaway  Share   Source:  PLG  Crude  by  Rail   &  Tank  Car  Forecast,  Feb.   2015   Proportion  of  production  handled  by  rail  expected  to  ramp  up  through   2017  and  then  drop  back  as  pipeline  capacity  starts  to  develop     The  North  American  Energy  Revolution:    Implications  for  Rail  
22   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  
23   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     §  Three  tank  car  specification  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  had  been  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  
24   Total  Tank  Car  Fleet  Forecast  by  Market  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   9%   SUBJECT  TO   RETIREMENT,   STORAGE,  OR   RESTRICTED  USE   DUE  TO   REGULATION   54,055   13%   2019   Total  Fleet:364,847     Total  Fleet:  423,396    
25   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  $5/   §  US  government  will  likely  limit  LNG  export  to  protect   US  from  world  gas  market  price   Low-­‐cost  gas  and  NGLs  driving  US   industrial  “renaissance”   US  Shale  Gas  Background  and  Future   The  North  American  Energy  Revolution:    Implications  for  Rail   Source:    EIA,  February  2015   60   70   80   90   2013   2014   2015   2016   U.S.  Natural  Gas  Production  (Bcf/day)   Actual   Forecast   0   5   10   15   Natural  Gas  Price  at  Henry  Hub  ($/MMBTU)   Historical   Futures   Source:  EIA  for  historical  and  CME  Group  for  futures  as  of  Jan.  14,  2015  
26   Shale  Gas,  NGLs,  and  Downstream  Chemical  Processing   Ethane  and  propane  production  growth  with  shale  gas   §  Raw  NGLs  (y-­‐grade)  are  extracted  creating  dry  gas  and  y-­‐grade  streams;  dry  gas  primarily  used  as  a  fuel  for  heat  and  power   §  Y-­‐grade  is  sent  to  a  fractionator  where  it  is  made  into  “purity”  NGLs  –  ethane,  propane,  butane,  iso-­‐butane,  natural  gasoline   §  Ethane  and  propane  are  the  largest  components  of  the  y-­‐grade  and  are  therefore  seeing  large  growth  in  the  U.S.     §  U.S.  infrastructure  build-­‐out  continues  to  process  the  huge  low  cost  production  volume  increase  in  ethane  and  propane   Source:  OPIS,  December  2014  &  CME  Group,  December  2014   Gas  Value  Chain   The  North  American  Energy  Revolution:    Implications  for  Rail   Source:  Bentek:  North  American  NGLs  4Q2014  
27   Over  $120B  of  New  Shale-­‐Related  Manufacturing  Investments  Have  Been  Announced   The  North  American  Energy  Revolution:    Implications  for  Rail   Ethylene  and  Propylene   Ammonia  and  Derivatives   Methanol   Polymers  and  Resins   Chlor-­‐alkali   Other   Source:  American  Chemistry   Council  and  PLG  analysis  
28   US  Chemical  Industry  Build-­‐Out   Abundant  feedstock,  structural  cost  advantages,   and  domestic  market  growth  driving  US   petrochemical  industry  expansion     Rate  of  expansion  growth  will  be  slowed  by     §  Lack  of  EPC  capacity   §  Shortage  of  craft  labor  resources  in  the  U.S.  Gulf  Coast   §  Increasing  regulatory  hurdles  and  delays     Expansion  peak  will  be  dampened  and  overall   build-­‐out  will  take  longer  than  announced   schedules     U.S.  chemical  industry  is  entering  a  historic   growth  period  with  incredible  growth   opportunities  and  challenges     Source:  ACC  and  PLG  Analysis,  December  2014   ACC  Estimate   PLG  Estimate   U.S.  Chemical  Industry  Capital  Investment:  Incremental  Due  to  Shale  Gas   The  North  American  Energy  Revolution:    Implications  for  Rail   0   500   1,000   1,500   Saudi   Ethane   US  Ethane   US   Weighted   WE  Low   Cost   Asia   Naphtha   US   Naphtha   Dec.  2013   Dec.  2014   Source:  Townsend  Solutions,  December  2014     Cash  Cost  US$/ton  (Ethylene)  
29   Presentation  Summary   We  are  in  the  early  innings  of  the  North  American  energy   revolution   §  Natural  gas  –  the  first  shale  “oversupply”  example   §  Crude  oil  –  new  shale  and  maturation  of  Canadian  oil  sands     §  NGL  –  a  valuable  byproduct  from  natural  gas  and  crude  drilling   §  Downstream  chemicals  and  manufacturing  –  coming  soon!   Lower  hydrocarbon  pricing  environment  is  mainly  caused  by   oversupply   §  Pricing  will  speed  up  cost  reduction  throughout  supply  chain   §  Industry  consolidation  will  ensure  long  term  global    competitiveness   §  Lower  oil  prices  will  dampen  growth  profile  for  frac  sand  and  crude  by  rail  volume  in   the  short  term   §  Tank  car  and  small  covered  hopper  market  has  shifted  gears  to  “neutral”  for  now   Near-­‐term  (2015-­‐2016)  turbulence  on  the  way  to  10+  years  of   growth  and  industrial  expansion   §  Net  positive  for  rail  industry;  growth  opportunities  for  wide  variety  of  railcar  types     The  North  American  Energy  Revolution:    Implications  for  Rail  
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/  

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Plg refc presentation 2015 v gb 16 9 aspect final 030115

  • 1.
    Logistics         Engineering         Supply  Chain         The  North  American   Energy  Revolution:     Implications  for  Rail     Prepared  for:   Rail  Equipment  Finance  Conference  2015       Graham  Brisben   CEO,  PLG  Consulting     March  2,  2015  
  • 2.
    2   Experience     §  Delivering  value  to  over   200  clients  since  2001   §  Real-­‐world,  industry   veterans     §  Logistics,  engineering  &   supply  chain  experts  with   operational  experience   Core  Expertise   §  Bulk  Logistics     §  Freight  Rail   §  Energy  &    Chemical   Markets   §  Private  Equity  and   Corporate  Development     About  PLG  Consulting   Partial  Client  List   Services     §  Diagnostic  assessments  &   optimization   §  Logistics  Infrastructure   design   §  Supply  chain  design  &   operational  improvement   §  Investment  strategy,  target   identification,  due  diligence,   post-­‐transactional  support   §  Crude  by  rail  (CBR)  and  rail   tank  car  (RTC)  forecasts   §  Independent  technology   assessment  &   implementation   §  Hazmat  training,  auditing  &     risk  assessment  
  • 3.
    3   Deep  rail  industry  experience   §  Operational   §  Commercial     §  Design  &  engineering     §  Equipment  market     Broad  energy  industry  client   experience  over  past  five  years     §  E&P  companies   §  Oilfield  services   §  Refiners   §  Terminal  developers/midstream   §  Investors  –  private  equity,  hedge  funds,   investment  banks   §  Government  agencies,  industry  trade   groups   §  Equipment  manufacturing  &  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   Representative  Producer  Gains,  Eagle  Ford   Source:  RBN  Energy,  December  2014  
  • 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   U.S.  Crude  Oil  Production  and  Imports   The  North  American  Energy  Revolution:    Implications  for  Rail   0   2,000   4,000   6,000   8,000   10,000   12,000   1970   1972   1974   1976   1978   1980   1983   1985   1987   1989   1991   1993   1996   1998   2000   2002   2004   2006   2009   2011   2013   U.S.  Crude  Oil  Production  (kbpd)   Source:  EIA,  February  2015   U.S.  crude  oil  production  growth   §  Crude  oil  production  over  9  MMbpd,  up  from  5  MMbpd  in  2008   §  Growth  has  come  primarily  from  shale  oil  production  of  light   crude   §  2015  production  close  to  US  record  of  1970   Decrease  in  crude  oil  imports   §  Shale  crude  has  been  pushing  out  light  crude  imports   §  Heavy  sour  crude  imports  have  been  steady,  with  Canada  growing   to  become  the  primary  US  supplier   §  2/3-­‐1/3  ratio  of  imports  to  domestic  production  has  inverted  since   2005   0   2,000   4,000   6,000   8,000   10,000   12,000   2005   2006   2007   2008   2009   2010   2011   2012   2013   2014   U.S.  Crude  Oil  Imports  (kbpd)   Source:  EIA,  February  2015  
  • 7.
    7   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  (2/9/2015)   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  
  • 8.
    8   Producer  Rates  of  Return  by  Play  and  Product   The  North  American  Energy  Revolution:    Implications  for  Rail   Source:  RBN  Energy,  February  2015   At  $50/bbl  oil,   producers  mostly  at   or  below  breakeven    
  • 9.
    9   …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%     Source:  Baker  Hughes,  February  2015   0   500   1,000   1,500   2,000   U.S.  Land  Oil  Rigs   ~30%  decline  in  onshore  operating  rigs   Conversely,  Canadian  oil  sands  producers  are   completing  in-­‐process  wells  as  they  already   have  significant  investments  made   The  North  American  Energy  Revolution:    Implications  for  Rail  
  • 10.
    10   …However,  Crude  Oil  Production  Will  Continue  To  Grow   0   2   4   6   8   10   Lower  48  States  (excl  GOM)  Crude  Oil  Production   (MMBPD),  Includes  Lease  Condensate   Source:  EIA,  February  2015   Source:  CAPP,  January  2015   Cost  reduction  focus  and  “sweet  spot”  drilling  will   continue  to  lower  break  even  cost     Held  by  Production  (HBP)  lease  clauses  will  help   support  production   Smaller,  weaker  players  will  fall  while  stronger   producers  will  actually  grow  during  downturn   Oil  sands  has  a  20-­‐50  year  view  on  projects   R&D  budgets  cut;  new  greenfield  projects  delayed   SAGD  wells  have  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   Crude  Oil  Price  Forecast   The  North  American  Energy  Revolution:    Implications  for  Rail   $0   $10   $20   $30   $40   $50   $60   $70   $80   $90   2015   2016   2017   2018   2019   2020   2025   WTI  (Cushing)  Forecast  Pricing   Source:  Turner  Mason,  February  2015   Crude  oil  prices  forecasted  to   improve  as  supply  contracts,   global  demand  increases  over   several  years     2015  will  be  very  challenging     Return  of  $100/bbl.  oil:    don’t   hold  your  breath     However,  forecasted  price  levels   for  2017  and  beyond  will  sustain   continued  growth  in  production   (and  frac  sand,  CBR)  
  • 12.
    12   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   The  North  American  Energy  Revolution:    Implications  for  Rail   The  next  wave:   Manufacturing  renaissance  in  the  US  based  on  abundant,  low  cost   energy  and  feedstocks   Impacts  to-­‐date  include:       Dramatic  reduction  in  crude  imports,  lower  electricity  costs,  lower   gasoline  prices,  increased  refined  products  exports    
  • 13.
    13   Downstream  Impacts  –  Railcar  Demand   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   The  North  American  Energy  Revolution:    Implications  for  Rail   Since  2010   2017  onward  
  • 14.
    14   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  
  • 15.
    15   Frac  Sand  Demand   The  North  American  Energy  Revolution:    Implications  for  Rail   Fracking  technology  changes  drove  major   growth  in  frac  sand  through  2014   §  Nearly  100B  lbs.  in  2014   §  “Fatter”  fracs  drove  increased  well  sand  intensity;  up   to  100  cars  per  well   §  New  demand  for  100  mesh  product;  eastern  MO   emerged  as  a  major  new  supply  area   However,  significant  market  contraction   underway  in  2015   §  “Wind  down”  taking  place  in  shale  plays  with  large   fracking  crew  layoffs;  expect  volume  decreases  up  to   40%   §  Inventories  up,  slower  railcar  velocities   Demand  expected  to  flatten  for  next  two   years   §  Reflects  pullback  in  new  exploration  and  drilling;   decline  in  onshore  rig  count   As  with  last  contraction  (2012),  logistics  becomes   the  main  platform  for  competition   §  Increased  mode  shifts  where  possible  (rail  to  barge)   §  Consolidation  expected  among  producers,  service  providers     Source:    PacWest  ProppantIQ,  December  2014  
  • 16.
    16   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”   §  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  
  • 17.
    17   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  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   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   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   Source:  NDPA,  STB,  PLG  Analysis,  February  2015  
  • 18.
    18   Pipeline  Build-­‐out  Remains  Key  Logistics  Issue  for  Oil  Sands   Current  pipelines  are  at  capacity  with  higher   apportionment  due  to  maintenance  and  expansion   Oil  Sands  pipelines  are  under  intense  scrutiny  and   subject  to  court  challenges  and  protests  in  U.S.  and   Canada   §  NEB  has  extended  its  review  of  Trans  Mountain  expansion  by  7   months;  recent  Canadian  Supreme  Court  ruling  gives  more  power  to   First  Nations  in  land  claims   Innovation  with  existing  pipelines  increasing  capacity   §  Enbridge  has  temporarily  switched  the  flows  of  Alberta  Clipper  and   Line  3  on  17.5-­‐mile  segment  across  the  U.S.-­‐Canadian  border;  will   maximize  the  flows  under  existing  permits  until  the  Department  of   State  review  is  completed  on  expansion     §  Increased  Alberta  Clipper  flows  by  27%  to  570  kbpd  in  September   2014  and  potentially  up  to  800  kbpd  in  2015   Large  Canadian  oil  producers  and  pipeline  companies   are  strategically  investing  in  CBR  for  short  and  long   term  flexibility   Likely  Built  Within  Medium   Term  (~2019)   §  Trans  Mountain  Express   (Kinder  Morgan)   §  Alberta  Clipper  (Enbridge)   §  Keystone  XL  (TransCanada)   Likely  Delayed  Until   2020  or  Later   §  Northern  Gateway   (Enbridge)   §  Energy  East   (TransCanada)   The  North  American  Energy  Revolution:    Implications  for  Rail  
  • 19.
    19   NA  Crude  Logistics  Today   Sources:  EIA,  PLG  analysis  (Google  Earth)     Light/Sweet   Heavy/Sour     Pacific   Northwest   Refiners   California   Refiners   2,525   kbpd   PADD  V   Demand   Midwest     Refiners   3,375   kbpd   PADD  II  Demand   East  Coast  Refiners   PADD  I  Demand   1,075   kbpd   LA  Gulf  Coast  Refiners   TX  Gulf  Coast   Refiners   PADD  III     Demand   8,150   kbpd   Eagle  Ford   Permian   Bakken   Rail   Pipeline     Oil  Sands   GOM   The  North  American  Energy  Revolution:    Implications  for  Rail   Light/Sweet   Heavy/Sour    
  • 20.
    20   Bakken  Production  and  Takeaway  Share   CBR  share  of  production  expected  to  remain  stable  due  to  the   optionality  it  provides  and  the  lack  of  pipeline  options  to  the  key   markets  on  West  and  East  Coast      -­‐          200      400      600      800      1,000      1,200      1,400      1,600     2014   2015   2016   2017   2018   2019   Bakken  Takeaway  Forecast  (kbpd)   Crude  by  Rail  Forecast   Pipeline  Forecast   Local  Refinery  Forecast   Note:    Based  on  current   $50-­‐55  WTI  price   remaining  constant   Source:  PLG  Crude  by  Rail   &  Tank  Car  Forecast,  Feb.   2015   The  North  American  Energy  Revolution:    Implications  for  Rail  
  • 21.
    21    -­‐          500      1,000      1,500      2,000      2,500      3,000      3,500      4,000      4,500      5,000     2014   2015   2016   2017   2018   2019   Western  Canada  Takeaway  Forecast  (kbpd)   CBR  Forecast   Pipeline  Forecast   Local  Refinery  Forecast   Note:    Based  on  current   $50-­‐55  WTI  price   remaining  constant   Western  Canada  Production  and  Takeaway  Share   Source:  PLG  Crude  by  Rail   &  Tank  Car  Forecast,  Feb.   2015   Proportion  of  production  handled  by  rail  expected  to  ramp  up  through   2017  and  then  drop  back  as  pipeline  capacity  starts  to  develop     The  North  American  Energy  Revolution:    Implications  for  Rail  
  • 22.
    22   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  
  • 23.
    23   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     §  Three  tank  car  specification  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  had  been  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  
  • 24.
    24   Total  Tank  Car  Fleet  Forecast  by  Market  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   9%   SUBJECT  TO   RETIREMENT,   STORAGE,  OR   RESTRICTED  USE   DUE  TO   REGULATION   54,055   13%   2019   Total  Fleet:364,847     Total  Fleet:  423,396    
  • 25.
    25   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  $5/   §  US  government  will  likely  limit  LNG  export  to  protect   US  from  world  gas  market  price   Low-­‐cost  gas  and  NGLs  driving  US   industrial  “renaissance”   US  Shale  Gas  Background  and  Future   The  North  American  Energy  Revolution:    Implications  for  Rail   Source:    EIA,  February  2015   60   70   80   90   2013   2014   2015   2016   U.S.  Natural  Gas  Production  (Bcf/day)   Actual   Forecast   0   5   10   15   Natural  Gas  Price  at  Henry  Hub  ($/MMBTU)   Historical   Futures   Source:  EIA  for  historical  and  CME  Group  for  futures  as  of  Jan.  14,  2015  
  • 26.
    26   Shale  Gas,  NGLs,  and  Downstream  Chemical  Processing   Ethane  and  propane  production  growth  with  shale  gas   §  Raw  NGLs  (y-­‐grade)  are  extracted  creating  dry  gas  and  y-­‐grade  streams;  dry  gas  primarily  used  as  a  fuel  for  heat  and  power   §  Y-­‐grade  is  sent  to  a  fractionator  where  it  is  made  into  “purity”  NGLs  –  ethane,  propane,  butane,  iso-­‐butane,  natural  gasoline   §  Ethane  and  propane  are  the  largest  components  of  the  y-­‐grade  and  are  therefore  seeing  large  growth  in  the  U.S.     §  U.S.  infrastructure  build-­‐out  continues  to  process  the  huge  low  cost  production  volume  increase  in  ethane  and  propane   Source:  OPIS,  December  2014  &  CME  Group,  December  2014   Gas  Value  Chain   The  North  American  Energy  Revolution:    Implications  for  Rail   Source:  Bentek:  North  American  NGLs  4Q2014  
  • 27.
    27   Over  $120B  of  New  Shale-­‐Related  Manufacturing  Investments  Have  Been  Announced   The  North  American  Energy  Revolution:    Implications  for  Rail   Ethylene  and  Propylene   Ammonia  and  Derivatives   Methanol   Polymers  and  Resins   Chlor-­‐alkali   Other   Source:  American  Chemistry   Council  and  PLG  analysis  
  • 28.
    28   US  Chemical  Industry  Build-­‐Out   Abundant  feedstock,  structural  cost  advantages,   and  domestic  market  growth  driving  US   petrochemical  industry  expansion     Rate  of  expansion  growth  will  be  slowed  by     §  Lack  of  EPC  capacity   §  Shortage  of  craft  labor  resources  in  the  U.S.  Gulf  Coast   §  Increasing  regulatory  hurdles  and  delays     Expansion  peak  will  be  dampened  and  overall   build-­‐out  will  take  longer  than  announced   schedules     U.S.  chemical  industry  is  entering  a  historic   growth  period  with  incredible  growth   opportunities  and  challenges     Source:  ACC  and  PLG  Analysis,  December  2014   ACC  Estimate   PLG  Estimate   U.S.  Chemical  Industry  Capital  Investment:  Incremental  Due  to  Shale  Gas   The  North  American  Energy  Revolution:    Implications  for  Rail   0   500   1,000   1,500   Saudi   Ethane   US  Ethane   US   Weighted   WE  Low   Cost   Asia   Naphtha   US   Naphtha   Dec.  2013   Dec.  2014   Source:  Townsend  Solutions,  December  2014     Cash  Cost  US$/ton  (Ethylene)  
  • 29.
    29   Presentation  Summary   We  are  in  the  early  innings  of  the  North  American  energy   revolution   §  Natural  gas  –  the  first  shale  “oversupply”  example   §  Crude  oil  –  new  shale  and  maturation  of  Canadian  oil  sands     §  NGL  –  a  valuable  byproduct  from  natural  gas  and  crude  drilling   §  Downstream  chemicals  and  manufacturing  –  coming  soon!   Lower  hydrocarbon  pricing  environment  is  mainly  caused  by   oversupply   §  Pricing  will  speed  up  cost  reduction  throughout  supply  chain   §  Industry  consolidation  will  ensure  long  term  global    competitiveness   §  Lower  oil  prices  will  dampen  growth  profile  for  frac  sand  and  crude  by  rail  volume  in   the  short  term   §  Tank  car  and  small  covered  hopper  market  has  shifted  gears  to  “neutral”  for  now   Near-­‐term  (2015-­‐2016)  turbulence  on  the  way  to  10+  years  of   growth  and  industrial  expansion   §  Net  positive  for  rail  industry;  growth  opportunities  for  wide  variety  of  railcar  types     The  North  American  Energy  Revolution:    Implications  for  Rail  
  • 30.
    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/