PLG MARS Presentation Energy Logistics 070913

46
Professional Logistics Group Oil & Natural Gas: The Evolving Freight Transportation Impacts Prepared for July 9, 2013 Lake Geneva, WI Midwest Association of Rail Shippers

description

Oil and Natural Gas: The Evolving Freight Transportation Impacts

Transcript of PLG MARS Presentation Energy Logistics 070913

Page 1: PLG MARS Presentation Energy Logistics 070913

Professional Logistics Group

Oil & Natural Gas:

The Evolving Freight

Transportation Impacts Prepared for

July 9, 2013 Lake Geneva, WI

Midwest Association

of Rail Shippers

Page 2: PLG MARS Presentation Energy Logistics 070913

» Boutique consulting firm specializing in logistics, engineering,

and supply chain Established in 2001

Over 100 clients and 250 engagements

» Headquarters in Chicago USA, with team members

throughout the US and with “on the ground” experience in: North America / Europe / South America / Asia / Middle East

» Consulting services Strategy & optimization

Assessments & benchmarking

Transportation assets & infrastructure

Logistics operations

M&A/investments/private equity

» Key industry verticals Oil & gas

Chemicals & plastics

Wind energy & project cargo

Bulk commodities (minerals, mining, agricultural)

Industrial manufactured goods

Private equity

About PLG Consulting

2

Page 3: PLG MARS Presentation Energy Logistics 070913

3

The Shale Development

Revolution – Big Picture

Disruptive Technologies

• Hydraulic Fracturing

• Horizontal Drilling

Continuous Evolution

• Constant Change

• Rapid Change

Market Dynamics • Supply & Demand

• Customers

• Price

• Logistics

Page 4: PLG MARS Presentation Energy Logistics 070913

Hydraulic Fracturing and

Horizontal Drilling

4

» Rapid evolution of drilling technology Fracking first used in 1947

Revolutionary advances since 2009

Time required for drilling 15,000+ ft. well cut

in half in last two years (nine days vs. 18)

Dramatic increase in efficiency per rig,

making rig count alone no longer a significant

indicator of production

» US uniquely positioned for the

techniques Private mineral rights

Drilling intensity (wells per acre)

90% of rig fleet equipped for horizontal drilling

» Rapid ROI for E&P companies Typical well earns back capital cost in 1-2

years

Depending on play productivity, “break even”

point of $40-85/bbl.

Source: L. Maugeri, Harvard Kennedy School; PLG analysis

Page 5: PLG MARS Presentation Energy Logistics 070913

US Shale Plays

5

Gas:

Marcellus

Haynesville

Barnett

Oil:

Bakken

Eagle Ford

Permian Basin

Most Active Plays

Utica (NGLs)

Niobrara

Mississippi Lime

Emerging Plays

Page 6: PLG MARS Presentation Energy Logistics 070913

Shale Driving Growth in Natural

Gas and Crude Oil Production

» 1,759 rigs in operation in USA as of June 21, 2013

» 700% increase in shale gas production since 2007

» Domestic oil production at 21-year high (7.35 MM

bbl/day)

» IEA projects US to surpass Saudi Arabia in oil output,

Russia in gas output by 2020

6 Source: Baker Hughes 2013

GAS OIL THERMAL

Source: Baker Hughes

U.S. Crude Oil Production

Source: EIA

April 2013

7.35 MM bpd

Source: EIA

U.S. Natural Gas Annual Production

2012

24 Trillion cubic feet

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7

Shale Development Supply Chain

and Downstream Impacts

Feedstock (Ethane)

Byproduct (Condensate)

Home Heating (Propane)

Other Fuels

Other Fuels

Gasoline

Inputs >> Wellhead >> Direct Output >> Thermal >> Fuels >> Raw Materials >> Downstream Products

Gas

NGLs

Crude

Proppants

OCTG

Chemicals

Water

Cement

Generation

Process Feedstocks

All Manufacturing

Steel

Fertilizer (Ammonia)

Methanol

Chemicals

Petroleum Products

Petrochemicals

» Over $95B in new announced “energy intensive” industrial plant expansions will come on-line over the next five years

» Shale development impact on the railcar industry is long-term, wide-ranging, and positive with only one exception

Page 8: PLG MARS Presentation Energy Logistics 070913

Hydraulic Fracturing Materials Inputs

and Logistics – Per Well

8

Materials

Chemicals

Clean Water/

Cement

Proppants

OCTG (Pipe)

Source to

Transloading

2

Local source

40

5

Transloading to

Wellhead Site

8

~1,000

160

20

47 Total

Railcars

~1,200 Total

Truckloads

Oil/Gas/NGLs

Truck, Rail,

Pipeline

Waste Water

~500 Total

Truckloads

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9

Correlation of Operating Rig Count

with Sand and Crude Shipments

STCC 14413 (sand) and 13111 (petroleum) Source: US Rail Desktop, Baker Hughes

1,695

1,814

1,270

886 939

1,073

1,299

1,467

1,604 1,665 1,691

1,798

1,911 1,972 1,948 1,965

1,864

1,763 1,762 1,759

0

500

1000

1500

2000

2500

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2007 Avg. 2008 Avg. 2009 2010 2011 2012 2013

Op

era

tin

g O

ns

ho

re R

igs

Carl

oa

ds

Operating On Shore Rigs

All Sand Carloads

Petroleum Carloads

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All Sand Handled by Railroad

10 STCC 14413 Source: US Rail Desktop

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Sand Mining Overcapacity:

New Reality

11

» Growth in Wisconsin sand mining

industry has slowed

60 mine/processing operations proposed

June 2011 – June 2012

Four (4) proposed June 2012 – January

2013

» Transportation costs continue to

concern WI and MN sand

shippers

» Established Illinois companies

seeing significant upturns in

volumes and financial returns

» Industry consolidation continues

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Processed Sand Total

Delivered Cost

Source: PLG analysis 12

» Benchmark cost with well-executed performance Example unit train movement from Wisconsin to

Texas with total delivered cost of approx. $180/ton

Logistics drives ~60% of total delivered sand cost

» Potential for significant cost add-

ons caused by strategic and

tactical issues

Sub-optimal logistics network design or

infrastructure Manifest service (rail)

Multi-carrier vs. single line haul (rail)

Equipment/driver shortages

Poor planning and/or execution Rail and/or truck demurrage costs

– Performance penalties

Uncompetitive sand price

Poor sand quality

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Changes in Sand Logistics

Model and Costs

» Rail rate advantage for volume and unit train vs. manifest service

On a per-ton basis between Wisconsin and Texas, spreads are 17-29%

» Western carriers are driving single line hauls and encouraging

longer trains to Eagle Ford via pricing differentials

» Canadian and Eastern carriers are aggressively working to grow

their markets by providing very competitive pricing and securing

sand originations

CN/Superior Silica Sands – Poskin (Barron), WI

» Major sand providers establishing “in the play” transloading

facilities to provide ready access to product

U.S. Silica - East Liverpool, OH

U.S. Silica – San Antonio, TX

Potential 2nd facility under consideration in San Antonio, TX

» Post-boom market maturation

13 Source: PLG analysis

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Sand Railcar Market Conditions

» Conditions are normalizing Builder backlog has been resolved

– Wait time is now attributable to other car types in the pipeline

Many surplus cars have found homes

2013 total production of sand cars will be closer to the

historical average of 2,000 – 3,000 units

» Lease market settling into familiar patterns Traditional pricing behavior: Newer/286k cars more

expensive than older/263k cars

Cars with sub-optimal design (i.e. older grain cars) being

flushed out and replaced where possible

Lessors placing modest “spec” orders

Credit-worthiness of lessee is still a critical criteria

Market is still trying to find its feet

» Looking forward

Positive developments in housing/construction should

equate to additional demand for small cube hoppers

General optimism that demand from sand shippers may

also strengthen 14

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Shale Play Product Flows Outbound

» Natural Gas

Majority via pipelines, some trucks

» Natural Gas Liquids (NGLs)

Requires processing (fractionation)

3-9 gallons/MCF (thousand cubic feet)

– Ethane ~42%

– Propane ~28%

– Normal Butane ~8%

– Iso-Butane ~9%

– Condensate ~13%

» Crude Oil

Bakken play as a model

Surging Permian and Eagle Ford development

15

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Shale Development Natural

Gas Impacts

» Industry a “victim of its own success” Fracking results in oversupply; gas prices down

33% since 2010

Rigs leave Marcellus, other gas plays for oil

plays

Helped to deflate frac sand boom

» Lower gas prices have resulted in 10-

13% market share capture from coal for

thermal generation

» Low gas prices fueling industrial

renaissance Overall manufacturing (cost of electricity; “re-

shoring”)

Specific sectors that use natural gas as a

feedstock – Methanol (16MM m/t new capacity under consideration)

– Steel

– Fertilizer

16

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Source: EIA, Deloitte

Natural Gas Displacement of Coal

for Thermal Generation

» Natural gas now supplying approx. 30% of thermal fuel demand (~13% share

capture from coal)

» Despite recent increases in prices, natural gas share capture expected to

maintain or grow Environmental regulations of coal burning

Scheduled coal unit retirements

» Adversely affecting coal industry, railroad coal loadings

17

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Shale Related Rail Traffic Still Small

Relative to Coal Volumes

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

200

8

200

9

201

0

201

1

201

2

20

13

Sand Crude

Coal

Carl

oad

s

Quarterly Data

Railcars Handled: Sand , Crude & Coal

Sand

Crude

Coal

STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop 18

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Coal, Crude & Sand Trends:

Carloads and Revenue

Total Coal Cars Handled

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

-

1

2

3

4

5

6

7

8

9

10

Billi

on

s

Carl

oad

s

Mil

lio

ns

Carloads Revenue

Total Crude & Sand Cars Handled

19

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

-

100

200

300

400

500

600

700

800

900

Bil

lio

ns

Th

ou

san

ds

Sand Crude Revenue

STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop

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Shale Gas Driving Steel

Manufacturing Comeback in US

20

» Shale gas boom makes direct-reduced iron steel economical DRI plants viable with growth in shale gas

Not new technology, but preferable with lower cost natural gas

DRI process uses natural gas in place of coal to produce iron

Cost of production 20% lower per ton vs. traditional blast furnace

» U.S. jobs and international investment Steel production in the U.S has shrunk 3.4% since 2008

– Compare to 14% growth in steel production internationally

– Domestic steel industry capacity running at 74%

At least five new DRI steel plants being considered in the U.S. – now economical for

the first time in 30 years due to low cost of natural gas

Both domestic and international firms investing in the technology

Initial investments create up to 500 jobs and 150 permanent employees

» Reciprocal growth Increased demand for U.S. steel creates greater demand for U.S. gas

Joint venture between Nucor Corp. and Encana Corp. commits $3 billion to

development of new gas wells to support DRI plants

Voestalpine $700MM investment in Texas

Potential US Steel-Republic Steel JV to produce DRI

DRI-derived steel of higher quality than that created from recycled scrap, further

driving demand

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Shale Gas Development Impact

on Fertilizer Market

» Natural gas is a feedstock for ammonia production Represents ~70% of cash costs (CF Industries)

» Lower gas prices directly benefit American farmers Increased demand for corn, soybeans has driven fertilizer costs higher

Excess natural gas supply can be utilized to produce greater volumes of

nitrogen-based fertilizer more economically

» Cheap U.S. natural gas means billions in investment for

new domestic fertilizer plants, displacing ~11 MM m/t of

imports Orascom/Iowa Fertilizer Company - Wever, IA

CHS - Spiritwood, ND

Ohio Valley Resources - Spencer County, IN

Yara - Belle Plaine, SK Canada

North Dakota Grain Growers Association - Williston Basin, ND

CF Industries – expansions at Donaldsonville, LA and Port Neal, IA

PotashCorp - resumption of ammonia production at Geismar, LA

Agrium – KY or MO

» Rush of new plant announcements has sparked

oversupply concerns, cancelations (Yara, Agrium) 21

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Looking Ahead: Natural Gas

» Oversupply conditions expected to persist

through 2015

» Factors that could revive demand, production,

and prices (>$5/MMbtu) Industrial use expansions come online over next 5 years

Continued toughening of EPA regulations of coal

Historic import/export reversal of US/Canada natural gas

flows by 2014 (Marcellus gas exports to Canada)

Technology advancements for increased use of CNG as a

transportation fuel

22

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LNG Export Opportunity

» Political/policy battle between domestic industrial users and producers

» Sabine Pass, LA and Freeport, TX now permitted for exports 3.4 Bcf/day export capacity to come online by 2015

Represents ~5% of projected US dry gas production

23 Source: Waterborne Energy Inc. Data in $US/MMBtu

Source: Congressional Research Service, EIA

Selected US Natural Gas Import & Export Infrastructure

» 20 additional terminal applications

totaling 29 Bcf/day of export capacity

pending before FERC

Page 24: PLG MARS Presentation Energy Logistics 070913

Shale Development NGL Impacts

» Leading NGL and “wet gas” plays are Eagle

Ford, Utica Significant investment and expansion of gathering,

fractionation, and takeaway capacity underway in the Utica

Play

Takeaway capacity in Eagle Ford well exceeds current

production (4x)

» Requires fractionation facilities proximal to

production “Y-grade” must be separated into purified products

75% of fractionation capacity in US Gulf Coast

Mt. Belvieu, TX major trading & storage hub

500 Mb/d of new fractionation capacity planned for Utica

Utica NGL production growth expected to exceed 600%

between 2013-2015

» Similar to dry gas, strong production due to

fracking has resulted in oversupply and

depressed prices Chemical industry benefits

24

Page 25: PLG MARS Presentation Energy Logistics 070913

Source: American Chemistry Council, May 2013

Shale Development Impact:

Chemical Industry

» Abundant ethane supplies have sparked chemical industry renaissance

Ethane is “cracked” to make ethylene, the most basic building block in the chemicals supply chain

Planned expansions will increase US ethylene capacity by 33% (11 MMmt)

USA is now the low-cost producer of ethylene-based chemicals due to abundant supplies of ethane from shale plays (up to

60% raw materials cost advantage)

25 Source: EIA

Domestic end-use

of materials, i.e.

plastics, will

expand

significantly

Up to 40% of new

petrochemical

output will be for

export

New demand for

plastic resin

hoppers, specialty

and pressure tank

cars

Page 26: PLG MARS Presentation Energy Logistics 070913

Natural Gas & Petrochemical

Downstream Products

Feedstock/

Intermediary

Finished

Products

Natural Gas,

OIl

Ethane,

Naphtha, etc.

Ethylene

Miscellaneous

Vinyl Acetate

Linear

Alcohols

Ethyl

Benzene

Ethylene

Oxide

Ethylene

Dichloride

High Density

Polyethylene

Low-Density

Polyethylene

Adhesives, coatings, textile/

paper. finishing, flooring

Detergents

Styrene

Ethylene

Glycol

Vinyl Chloride

House wares, crates,

drums, food containers,

bottles.

Food packaging, film,

trash bags, diapers, toys

PVC

Antifreeze

Fibers

PET

Miscellaneous

Polystyrene

SAN

SBR

Latex

Miscellaneous

Medical gloves,

carpeting,

coatings

Tire, hose

Instrument lenses,

house wares

Insulation, cups

Siding, windows,

frames, pipe, medical

tubing

Pantyhose,

carpets, clothing

Bottles, film

26

Page 27: PLG MARS Presentation Energy Logistics 070913

Looking Ahead: NGLs

27

Source: Canadian Energy Research Institute

Source: Sunoco Logistics

» The (somewhat) hidden Condensate story

Used as diluent for heavy Canadian tar sands oil – critical for

transportation as “Dilbit”

Significant investment in infrastructure being made to deliver

Eagle Ford, Utica condensate to Western Canada

Primary delivery via pipeline, but major rail volumes ex. Utica

are required to get to Midwest pipeline injection points

Demand expected to grow from 200 Mb/d to 500 Mb/d by 2020

» Expect export market for NGLs to expand

Pipeline reversals undertaken to meet demand, particularly ex.

Utica to Sarnia, ON petrochemical complex and export storage

and dock facilities in Philadelphia

Page 28: PLG MARS Presentation Energy Logistics 070913

Shale Development

Crude Oil Impacts

» Dramatic increases in US production due to fracking 7.35 MM bbl./day

Projected to grow by ~30% over next four years

Strong play in Bakken; surging Permian and Eagle Ford development

“Tight” oil sources driving overall North American growth

Production forecasts frequently revised upward

North America should be crude oil independent by 2018 (total bbls produced)

28 Source: Morgan Stanley, February 2013

Page 29: PLG MARS Presentation Energy Logistics 070913

Driving Toward “Oil Independence?”

» Decreasing dependency on foreign crude Combination of US shale plus Canadian oil sands estimated to reduce

imports to <15% by 2020

West African imports already down ~70% from 2010 levels

» However, supply isn’t enough – “independence” also

relies on lower domestic fuels consumption CAFE standards the primary driver

» Reducing imports means reducing waterborne crudes Mid-continent sources displacing imports at coasts, making rail critical to

the total crude market

Bakken as case study for large crude by rail operations

29 Source: BENTEK Energy

Page 30: PLG MARS Presentation Energy Logistics 070913

Bakken Oil Production and Logistics

30

» 2010-2011 discount of ~$8-12/bbl for Bakken

crude vs. peer WTI Undervalued due to logistics constraints “stranding” the oil

» Early objective of crude-by-rail was to bridge

gap until pipelines built, but has now become

the primary transport mode for Bakken crude ~70% rail market share

Pipelines operating below capacity; some project

cancelations

» Significant development of crude by rail

loading terminals in 2011-2012 Takeaway capacity now exceeds production

Bakken vs. WTI differential near even (within ~$3)

North Dakota Crude Oil Production

~793,000 BPD April 2013

First outbound unit

train shipment

December, 2009

Source: EIA, PLG

Source: North Dakota Pipeline Authority, PLG Analysis

Page 31: PLG MARS Presentation Energy Logistics 070913

Crude Oil by Rail – North

Dakota Terminals

31

North Dakota Crude Oil Rail Loading Capacity (Barrels Per Day)

Rail Terminals 2013 2014* 2015* Rail Carrier

EOG Rail, Stanley, ND (Up to 90,000 BOPD) 65,000 65,000 65,000 BNSF

Inergy COLT Hub, Epping, ND (Q2 2012) 120,000 120,000 120,000 BNSF

Hess Rail, Tioga, ND (Up to 120,000 BOPD) 60,000 60,000 60,000 BNSF

Bakken Oil Express, Dickinson, ND 100,000 100,000 100,000 BNSF

Savage Services, Trenton, ND (Q2 2012 Unit Trains) 90,000 90,000 90,000 BNSF

Enbridge, Berthold, ND (Q4 2012) 80,000 80,000 80,000 BNSF

Great Northern Midstream, Fryburg, ND (Q1 2013) 60,000 60,000 60,000 BNSF

Musket, Dore, ND (Q2 2012) 60,000 60,000 60,000 BNSF

Plains, Ross, ND 65,000 65,000 65,000 BNSF

Global/Basin Transload, Zap, ND (Estimate Not Confirmed) 40,000 40,000 40,000 BNSF

BNSF Total Capacity 740,000 740,000 740,000

Plains - Van Hook, New Town, ND 65,000 65,000 65,000 CP

Dakota Plains, New Town, ND 30,000 80,000 80,000 CP

Global Partners, Stampede, ND 60,000 60,000 60,000 CP

CP Total 155,000 205,000 205,000

Various Sites in Minot, Dore, Donnybrook, and Gascoyne 30,000 30,000 30,000

Total Crude Oil Rail Loading Capacity 925,000 975,000 975,000

*Project still in the review or proposed phase Year End System Capacity

Source: North Dakota Pipeline Authority (June 2013), PLG Analysis

Page 32: PLG MARS Presentation Energy Logistics 070913

North Dakota Class I Railroads and

Crude Oil Terminals

32

Map by PLG Consulting

Page 33: PLG MARS Presentation Energy Logistics 070913

33

All Crude Handled by Railroad

Volume Growth

STCC 13111 Source: US Rail Desktop

Page 34: PLG MARS Presentation Energy Logistics 070913

34

Bakken Area

Outbound Pipelines

34 34

North Dakota Crude Oil Pipeline Capacity (Barrels Per Day)

Pipelines 2013 2014* 2015*

Butte Pipeline 160,000 160,000 160,000

Butte Loop* (Late 2014) - 110,000 110,000

Enbridge Mainline North Dakota 210,000 210,000 210,000

Enbridge Bakken Expansion Program (Q1-11/Q1-13) 145,000 145,000 145,000

Plains Bakken North (Q2 2013, Up to 75,000 BOPD) 50,000 50,000 50,000

High Prairie Pipeline* - 150,000 150,000

Enbridge Sandpiper* (Q1 2016) - - -

TransCanada Keystone XL* (2015) - - 100,000

TransCanada Bakken Marketlink * (4Q 2015) - - 100,000

Hiland Partners Double H Pipeline (Q3 2014, Up to 100,000 BOPD) 50,000 50,000

Pipeline Total 565,000 875,000 1,075,000

*Project Still in the Review or Proposed Phase Year End System Capacity

Source: North Dakota Pipeline Authority (June 2013)

Page 35: PLG MARS Presentation Energy Logistics 070913

Bakken Production vs. Total Takeaway

Capacity: 2013–2015 Projection

Year

ND Production

Forecast (Bpd)

Pipeline

Capacity

Rail Terminal

Capacity

Rail Carrier

Capacity

ND Refinery

Consumption

Total

Outbound &

Refinery

Capacity

Excess Logistics

Capacity

2013 850,000 565,000 925,000 1,300,000 68,000 1,558,000 708,000

2014 980,000 875,000 975,000 1,300,000 68,000 1,918,000 938,000

2015 1,150,000 1,075,000 975,000 1,350,000 108,000 2,158,000 1,008,000

Source: North Dakota Pipeline Authority, PLG Analysis Bpd = Barrels per Day

35

Page 36: PLG MARS Presentation Energy Logistics 070913

Crude Oil Pipelines – Existing

and Planned

36 Source: CAPP Report, 2013

» Current pipelines ex.

Bakken operating below

capacity However, volumes have increased

over past 60 days

» Pipeline industry has been

challenged by new dynamic

NA oil market Fixed routes, long lead times

10 year commitments required for

new build pipeline projects

Lack of subscription interest in KM

Freedom project (Permian-

California)

» Several natural gas pipeline

conversions planned Trunkline (ETP) – Patoka, IL-St.

James, LA

Energy East (TransCanada) –

Hardisty, AB-St. Johns, NS

Page 37: PLG MARS Presentation Energy Logistics 070913

Crude Oil by Rail vs. Pipeline

$6.50

$12.00 $10.50

$15.00

$-

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

Pipeline toCushing

Rail to Cushing Pipeline to PtArthur

Rail to PtArthur

Do

lla

rs P

er

Ba

rre

l

Source: PLG analysis 37

» Rail cost: 50-100% more expensive than

pipeline transport

» Near-term offsetting rail advantages: Site permitting, construction much faster

Lower capital cost

Scalable

Shorter contracts (2-3 year commitments vs. 10 years

for pipeline)

Faster transit times

Access to coastal areas not connected via pipeline

Origin/destination flexibility

Primary advantage: Tool of arbitrage for trading desks

» Rail pricing drivers Advantaged rate structures for first-movers, volume,

and unit train operators

“Floor” has been set for crude by rail pricing

Crude price differentials more important than cost vs.

pipeline

Cost Comparison: Bakken to Cushing and USGC

Page 38: PLG MARS Presentation Energy Logistics 070913

38

Logistics Challenges of

Light/Sweet vs. Heavy/Sour

Crudes » Not all crudes are created equal – light/sweet vs.

heavy/sour Brent, WTI, and US shale play crudes (Bakken, Permian, Niobrara,

Permian) are light/sweet

Heavy/sour crudes include Western Canada, Venezuela, Mexico,

Alaska North Slope (ANS), Middle East (light/sour)

Heavy/sour has higher sulfur content, yield for asphalt, diesel

» Refineries are generally configured to run certain

types of crude Significant investments made ($48B since 2005) at select refineries

to install coker units that will allow processing of heavy/sour

Major heavy/sour refining clusters: Corpus Christi, Houston,

Chicago, southern Illinois, California

» The special case of the Canada Oil Sands Heavy/sour crude has a natural home in Midwest and US Gulf

Coast (~2.8 MM bpd demand at USGC)

Pipeline capacity to US Midwest refining centers is at capacity

Pipeline developments to coasts, US markets still 2+ years away

Dilbit via rail requires coiled, lined/insulated cars

» US is close to saturation point on light/sweet crude

at mid-continent and USGC refining areas

38

Source: CAPP, June 2013

Source: Turner Mason, RBN Energy

US Crude Oil Production

Growth by Grade

Page 39: PLG MARS Presentation Energy Logistics 070913

39

Shale Development and Crude By

Rail Impact on Market Dynamics

» Price differentials driving trading and logistics patterns

» Original objectives (2009-2010) of crude by rail to “bridge the gap” until pipelines built

» By 2012, crude by rail viewed as a core mode of transportation and means of arbitrage Differentials made rail attractive: Bakken and WTI trading at ~$10-$15/bbl. less than Brent; Alberta Bitumen trading at

~$30/bbl. less than Brent

39

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

– New multi-modal terminals/trading hubs at destination

markets (i.e. Cushing, OK, St. James, LA, Pt. Arthur, TX,

Albany, NY, Bakersfield, CA)

– Lease and purchase of railcar fleets

– Pipeline expansions, reversals, new construction

Refineries installing unit train receiving capability -

particularly coastal refineries previously captive to

waterborne imports (i.e. Philadelphia, PA, St. John,

NB, Anacortes, WA, Ferndale, WA)

» Today: Spreads have narrowed, limiting arbitrage

opportunities and slowing crude by rail volumes

Page 40: PLG MARS Presentation Energy Logistics 070913

Crude Transportation Costs

June 2013

Oil Sands

Bakken

Gulf Coast

Refiners

East Coast

Refiners

Pacific NW

Refiners

Cushing, OK

= Pipeline

= Rail

= Marine

40 Sources: Various industry sources, pipeline tariffs, PLG analysis

Page 41: PLG MARS Presentation Energy Logistics 070913

$86

Bakken wellhead

Gulf Coast Refiners

East Coast Refiners

Pacific NW Refiners

$94

Cushing, OK

= Pipeline

= Rail

$81

Oil Sands

Light/Sweet at USGC

Bakken (pipe): $96.50

Bakken (rail): $101

Brent (ship): $101.50

Heavy/Sour at USGC

Mexican Maya (ship): $96

WCS (pipe): $99

WCS (rail): $104.50

Light/Sweet at LA Gulf

Bakken (rail): $101

LLS (local): $103

LA Gulf Refiners

Light/Sweet at East Coast Bakken (rail): $100.50

Brent (ship): $101

Light/Sweet at PNW

Bakken (rail): $98.50

Brent (ship): $101

Crude Price Differentials By Source,

Grade, and Destination – June 2013

$91

Bakken - Clearbrook

Sources: EIA, Bloomberg, Platts,

Baytex Energy, PLG analysis

Dec. 2012 Spread Current Spread Change

Brent - WTI $21.83/bbl $5.94/bbl -$15.89/bbl

LLS - WTI $20/bbl $7.90/bbl -$12.10/bbl

Mexican Maya - WCS $33.55/bbl $15.27/bbl -$18.28/bbl

WTI - Bakken (Clearbrook) $3/bbl $3/bbl $0/bbl

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Page 42: PLG MARS Presentation Energy Logistics 070913

42

Crude Tank Car Market Conditions

» Potential bottleneck: Railcars Current order backlog runs to early 2015 (~48,000 cars)

Major purchases by oil majors and midstream companies

Extremely tight market with very high lease rates

Current crude by rail fleet ~30,000 railcars, or 1-1.5 MM

bbl./day equivalent

Short term demand is highly dependent on WTI – Brent

spread

» Railcar type is important General service 31k gallon capacity cars can hold more

crude than heavier coiled cars

Coiled cars can transport heavier crudes that need heat to

offload

– Some shippers prefer the general purpose (GP) rail cars because the

larger capacity can be significant on their transportation cost for hauling

lighter crudes

– Some lessors prefer to have more coiled cars that have more uses than

general service cars built to hedge themselves on an oversupply of

general service tank cars if/when the crude by rail market declines

» Key question: If/is/when will the crude tank car

industry become overbuilt?

42

Page 43: PLG MARS Presentation Energy Logistics 070913

0

500

1,000

1,500

2,000

2,500

3,000

Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15

Th

ou

san

d b

bl/

day

Best-Case Crude by Rail Potential vs. Crude Railcar Capacity

Other Production Sources Williston (Bakken)

Oil Sands Crude Railcar Capacity

Forecast of Crude Railcar

Supply and Demand

43

» Production increases vs.

railcar capacity increases

March crude fleet was ~30k cars and

backlog was ~48.2k Backlog runs

through mid 2015

If pipelines and local refining can

consume production increases in

Permian and Eagle Ford, crude by

rail will be primarily Bakken and

Canadian Oil Sands productions

» Under best-case scenario for

rail market share capture, data

suggests existing & planned

tank car fleet exceeds

demand

Sources: CAPP, AAR, NDPA,

GATX, and PLG analysis

Railcar backlog is through mid 2015,

retirement of old railcars will reduce

capacity if no additional railcars built

Q1 2013 originated rail carloads of crude

petroleum were 97,135, which equates to

755,000 barrels per day (assume 700/bbl.

average capacity)

Assumptions:

• 80% of projected Williston Basin production

• 80% utilization of Oil Sands announced 300 kbpd of rail terminals through 2014, and 80% utilization of an additional 300

kbpd for 2015

• 30,000 crude railcars in March and build rate of 21,500 railcars/year through 2015 with attrition rate of 7,800

railcars/year

• 700 bbl. average railcar capacity and average 17 day turn

• Other production sources at constant 165 kbpd

Page 44: PLG MARS Presentation Energy Logistics 070913

44

Looking Ahead: North American

Crude Oil Logistics

» The gusher of new US light/sweet shale oil production made

possible by fracking has upended the traditional oil logistics and

trading patterns Result: “Wrong place/wrong oil” supply displacements, i.e. Cushing overflow

Rapid investment in new logistics infrastructure, routes, modes, and terminals

– Bakken now sufficiently developed; next immediate areas for significant investment are Utica, Oil

Sands, Permian, coastal areas and intermediate routes and facilities that support bitumen

transport in particular

» A “new normal” in crude oil flows will emerge in conjunction with

continued North American oil production over the next five years Continued shifts of mid-continent light/sweet to coastal destinations

New modes and infrastructure to get Canadian bitumen to USGC, with or without

Keystone XL

Permian, Eagle Ford to meet USGC light/sweet demand; Bakken flows primarily

east-west

Eventual government approval of crude oil exports on a limited basis, similar to LNG

» Primary threats to crude by rail business 1. Narrow WTI-Brent spread

2. Glut of Permian and Eagle Ford light sweet oil displacing rail volumes to USGC to

Gulf Coast (but somewhat offset by new rail deliveries from Oil Sands)

3. Continued pipeline development

4. Water-borne Eagle Ford crude deliveries to USEC

44

Key Drivers

Supply Sources

Oil Prices

Destination Markets

Capital

Source: CME and Morningstar

Page 45: PLG MARS Presentation Energy Logistics 070913

Looking Ahead: Crude Oil Anticipated

Production Growth and Product Flows

45

= Light/Sweet

= Heavy/Sour

= Pipeline

= Marine

= Rail

= Storage terminal(s)

= Refinery cluster – Light

Sweet/Intermediate

= Refinery cluster – Heavy

Sour/Intermediate

= Current b/d (000)

= Future b/d (000) additional by 2017 +420 123

Bakken

+492

871

Oil Sands

+605 1,985

Eagle Ford

+800 800

Permian

+480 1,200

Source: BENTEK Energy, CAPP, Railroad Commission of Texas, ND Pipeline Association, PLG Consulting

Page 46: PLG MARS Presentation Energy Logistics 070913

Thank You! For follow up questions and information, please contact:

Taylor Robinson, President

+1-508-982-1319 / [email protected]

Graham Brisben, CEO

+1-708-386-0700 / [email protected]

Jean Arndt, Vice President

+1-630-505-0273 / [email protected]

Jeff Dowdell, Senior Consultant

+1-732-995-6696 / [email protected]

Gordon Heisler, Senior Consultant

+1-215-620-4247 / [email protected]

Jeff Rasmussen, Senior Consultant

+1-317-379-5715 / [email protected]

Jay Olberding, Analyst

+1-636-399-5628 / [email protected]

This presentation is available at:

WWW.PLGCONSULTING.COM

Professional Logistics Group

46