PLG Reshoring Summit

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Taylor Robinson

President, PLG Consultingwww.PLGConsulting.com

Shale Oil & Gas —A Key Driver for

Reshoring in the Tri-State Area

http://www.PLGConsulting.com

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Topics

» About PLG Consulting

» Shale Oil & Gas 101

» Shale impact to the US

reindustrialization

» Wrap up

www.PLGConsulting.com

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About PLG Consulting

» Boutique consulting firm with team members throughout the US Established in 2001

Over 80 clients and 200 engagements

Significant shale development practice since 2010

» Consulting services Strategy & optimization

Assessments & best practice benchmarking

Transportation assets & infrastructure development

Supply Chain design & operationalization

M&A/investments/private equity

» Specializing in these industry categories: Energy

Bulk commodities

Manufactured goods

Private Equity


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Is The Shale Boom Different Than

Recent Energy Booms?

» Other recent energy “boom” events with major supply chain challenges….

» Common characteristics

New technology breakthroughs and/or dramatic market shifts

Speed to market is paramount -- supply chain strategies an afterthought

Rush of capital and new players

Continuous change and evolution required to improve efficiency

Previous two energy booms did not improve the cost of energy without

government incentiveswww.PLGConsulting.com

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Two Technology Breakthroughs Together:

Hydraulic Fracturing & Horizontal Drilling

Great YouTube video by

Marathon on fracing:

Http://www.youtube.com/watc

h?v=VY34PQUiwOQ


Http://www.youtube.com/watch?v=VY34PQUiwOQ

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US Shale Plays

Marcellus & Utica

- Large plays

- Great location

- Big potential

- Dry & wet


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Natural

Gas

• Proppants

• Clean water

• Chemicals

Materials

• Drilling Rigs

• OCTG (Pipe)

• Cement

Equipment

Shale Oil & Gas High Level

Supply Chain

Upstream

Exploration

Production

(Well Site)

Midstream Downstream

Refining

Fuel

Gasoline Distillates

Crude

Oil

Crude/

Gas

Mixture

Chemical

Feedstocks

Process

Product

Logistics Flow

Transportation

Processing

Gathering

Jet Fuel Residuals


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Shale Oil or Gas -- Which is more important

to US industry competitiveness?

0

200

400

600

800

1000

1200

1400

1600

Coal Natural Gas Nuclear Renewables Petroleum

Me

gaw

att

Ho

urs

(Th

ou

san

d)

Net Generation by Energy

37% (48% in 2007)

<1%

12%

19%

30% (21% in 2007)

Source: EIA

Source: EIA

» Natural Gas is 4X cheaper than oil on a

BTU-basis Not expected to change for the foreseeable future

Gas is more plentiful on most shale plays

» Gas drives an increasing share of the US

electricity generation capacity

» Gas by products are the “building blocks

of manufacturing”

» Gas’ cost advantages will drive new

innovation to convert gas to more fuels New long-haul trucks now available with natural gas

engines (CNG)

BNSF testing conversion to natural gas-fired trains (LNG)

Natural gas to liquid diesel conversion plants in planning

(Shell, Sasol)

Siluria Technologies converting natural gas into jet fuel

Increases gas demand

» Cleaner burning fuel 30% less carbon emissions than oil

53% less than coal

Net Generation by Energy Source (2012)

Energy Cost per Million BTU


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Chemical

Feedstocks

Downstream Supply Chain

Consumers

Petrochemicals

Aromatics AmmoniaMany

Others

Olefins

Ethylene Propylene Butylene

Polymers

Polybutadiene Polypropylene Polyethylene

Manufacturing

Intermediates become consumer and

industrial products

Natural

Gas Power Generation

Industrial Use

Consumer Use

Petrochemical

ProcessingRefinedCrude

Products

Process

Product

Logistics Flow


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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


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» Shale gas boom makes electricity costs lower

for US industries Reduced energy costs felt throughout supply chain

Large users are achieving greater even lower costs by buying

natural gas directly from wells with long term contracts

Some processes only become economically viable with lower costs

» Steel example -- Direct Reduction Iron (DRI) Shale gas strips oxygen from iron core to make high purity pellets

Produces higher quality steel vs. scrap steel

DRI pellets cost ~$270/ton vs. scrap steel cost ~$390/ton

At least five new DRI steel plants being considered in the U.S. by:

– Nucor/Encana, Bluescope Steel/Cargill, Essar Global Ltd.

Nucor signed a 20 year supply agreement with Encana Gas & Oil

» Reciprocal Growth and Other Industry Impacts Shale gas creates demand for OCTG steel pipe for wells

Increased demand for U.S. steel creates greater demand for U.S.

gas

Other energy-intensive industries will have great advantages and

are anticipating further expansions in the US

– Chemicals

– Glass

– Castings

31¢ 30¢

18¢

13¢9¢

7¢4¢ 3¢

0

5

10

15

20

25

30

35

¢/kW

h

A

Impact Of Shale Gas to US Industry --

Electricity Cost Competitiveness

Average Cost of Electricity (2012)

Three iron-ore storage domes stand near Nucor's direct-reduced iron plant in Convent, La.

www.wsj.com - Feb 1, 2013


http://www.wsj.com

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Gas Feedstock

Cost Competitiveness

» Gas feedstock (ethane) makes ethylene

very competitive Ethylene is feedstock for a broad range of chemical

products – a “building block” of manufacturing

>70 cents per pound more profit per pound from ethane

production compared to naphtha

Ethane-to-Naphtha cracker ratio

– Was 70%/30%

– Likely to reach 95%/5%

» Production capacity for ethylene set to

expand in U.S. -- abundant supply Investment in ethylene production has already increased by

33% domestically

Production capacity expected to rise by up to 35% in

coming years

Investments in the repair and expansion of existing

crackers also increasing

Ethane exports will grow fueling more demand for gas

Relative Profit Margins for Producing Ethylene from

Ethane and Naphtha


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The Graduate


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Pre-Shale Plastics Supply Chain

Component

Manufacturing

Lordstown

Assembly Plant

Imported crude

via vessel

(Naptha-based)

Resins

ship via

rail

Refineries

Resin

Plants

Cracker


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Potential Plastics Supply Chain

Gas Wells

CrackerResin

Plants

Lordstown

Assembly Plant

Component

Manufacturing

0

500

1000

1500

2000

2500

Asia USHistorical

Saudi US Recent

$/T

on

HDPE Calculated Cost

2018

1266

692

Sources: CMAI, TopLine Analytics, and Alembic analysis, 2012

» Local gas feedstock … local cracking …. local resin processing …. Local

manufacturing tremendous material, logistics and manufacturing cost advantage

» 5-10% total cost advantage potential vs. US Gulf Coast supply chain

» Plastics may replace other materials due to low cost – like aluminum, castings

HDPE Calculated CostPotential Scenario


526

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Manufacturing Cost of Goods

Sold (COGS) Comparison

» Direct & Indirect Materials make up 60-70% of typical manufactured component US has & will have substantive raw material cost advantages over much of the world

Winners will take advantage of constantly changing raw material markets with Value Engineering

Global sourcing capability still will remain a requirement

» Overseas shipping can account for 10% of the component cost – built in advantage for US

0

20

40

60

80

100

US 2008 China 2008

US vs. China COGS for Widget X - 2008

Direct Material Indirect Material Labor Overhead Shipping

0

20

40

60

80

100

US 2015 China 2015

US vs. China COGS for Widget X - 2015

Direct Material Indirect Material Labor Overhead Shipping

7080-20%

or more +10%?

US vs. China COGS for Widget X - 2008 US vs. China COGS for Widget X - 2015


100

80

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Key Questions for US manufacturers

1. Will we take advantage of the raw material & energy

cost advantages driven by shale gas?

2. Will we leverage the logistical cost and cash flow

advantages of local manufacturing?

3. Will we relentlessly lower our labor and overhead costs? PLG model assumes that US manufacturers can cut their labor and

overhead by 50% between 2008 & 2015

Must minimize all Supply Chain costs & cycle times from supplier to

customer

Lean and Six Sigma can’t be just buzzwords – must live it!

4. Will we lead our teams to do things differently than in the

past?


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Implications & Wrap Up

» Shale gas is a game-changer for US manufacturing

» US manufacturing must continuously reduce

their labor and overhead costs

» Competition will intensify, change, grow….

The Chinese will not easily give up on manufacturing US products

New entrants in US will use new materials and technology in many industries

“Innovate or perish”

» Shale Oil & Gas has additive benefits to the US economy

Energy independence – 2020 or 2025?

Driving large increase in exports – LNG, propane, petrochemicals, chemicals, plastics

Major improvement on trade deficit

Shale Oil & Gas supply chain will drive job growth


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

Taylor Robinson, President+1-508-982-1319 / [email protected]

This presentation will be available at:


“News” section


mailto:[email protected]

http://www.PLGConsulting.com

PLG Reshoring Summit

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