Shale Energy Transportation Logistics Impact
Transcript of Shale Energy Transportation Logistics Impact
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At a glance
Each segment of the
transportation and logistics
industries – railroads,
trucking, shipping, and
airlines – is experiencing
the dramatic impact of the
shale energy revolution
Shale energy: A potential game-changerImplications for the UStransportation & logistics industry
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In 2000, shale gas providedonly 1% of US natural gas
production; by 2011, it wasover 34%.
In 2000, shale gas providedonly 1% of US natural gas
production; by 2011, it wasover 34%.
Since 2010, the US hasemerged as the largest gas
producer in the world.
The U.S. Energy Information
Administration (EIA) forecaststhat by 2040, 50% of the UnitedStates’ natural gas supply willcome from shale gas.
The shale industry supported 1.7 million jobsin 2012 and contributed$62 billion in state and
federal tax revenue.
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3Shale energy: A potential game-changer Implications for US transportation & logistics industry
1 http://online.wsj.com/article/SB10001424127887324263404578614122954685146.html
2 http://fossil.energy.gov/programs/gasregulation/reports/summary_lng_applications.pdf
Introduction
The shale energy revolution is gaining speed in the United
States, transforming the way we do business. A recent articlein The Wall Street Journal called it “one of the biggest forces tohit the US economy in modern history.”1
Transportation and logistics companies are experiencing theimmediate and dramatic impact of this revolution. They areessential to the movement of people and equipment to theshale elds and the transportation of shale oil and gas from theelds to processing plants. Longer-term, there will be addi-tional opportunities for transportation and logistics companiesas the major energy players in the United States look to exportliqueed natural gas (LNG) derived from shale. There arecurrently about 20 applications before the US Department ofEnergy from companies wanting authorization to export LNG.2
Shale energy is also having a major effect on the chemicals andmanufacturing industries in this country, with clear ramica-tions for transportation and logistics companies. This newsource of abundant, low-cost energy is proving to be a signi-cant incentive for chemical producers and manufacturers toshorten their supply chain and bring production facilities backto the United States. A revived manufacturing sector wouldincrease the need for rail and trucking to move more products
domestically and for shipping exports abroad.
Following is a look at the implications of shale energy fordifferent segments of the transportation & logistics industry.
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4 PwC
The shale oil boom is creating signi-
cant opportunities for the railroads as ameans to transport people, equipment,
and oil. Railroads are being used to
haul the special sand, known as “frac
sand,” pipes, acids, and other chemi-
cals needed in the shale extraction
process. After extraction, rail is being
used to carry away waste products
and shale oil and gas. Rail carloads
of crude oil tripled last year to more
than 200,000.3
The inbound and outbound use ofrail has led to a surge in demand for
cars that can carry crude oil. At new
production sites, which do not have
existing pipelines, rail cars are being
used to transport oil and gas from the
elds to the reneries. Pipelines are
costly and time-consuming to build
and often subject to construction
delays because of the need to obtain
various permits. Rail car companies
are reaping the benets, experiencing
a backlog of orders for petroleum-
carrying cars, and reporting strong
nancial results.4
Railroads: expanded opportunities
In some shale-producing regions, the
railroads have had to build additionalinfrastructure to keep up with demand.
The Bakken shale eld in North Dakota
is a good example. By the end of 2010,
daily production had grown to the
point that it exceeded the capacity
of available transportation options,
requiring increases in rail infrastruc-
ture.5 This April, Bakken oil output
hit a record 727,149 barrels a day, and
about 75% of the oil was carried out
by trains.6 Rail has become the favored
mode of transport in the area becauseit is cheaper than trucking and more
exible than pipeline.
With the movement from coal to shale
as an energy source, the rail industry
will increasingly move shale-related
products. Based on the US Energy
Information Administration’s estimates
of shale oil, shale gas, and coal produc-
tion, and conservative assumptions
about rail’s market share of shale oil
transportation, the increase in shale-
related carloads should more than
offset the decline in carloads of coal by
2020 (see chart).
Rail car companiesare reaping thebenets, experiencinga backlog of orders for petroleum-carrying cars... 4
3 http://www.bloomberg.com/news/2013-01-03/buffett-like-icahn-reaping-tank-car-boom-from-shale-oil.html
4 http://www.bloomberg.com/news/2013-01-03/buffett-like-icahn-reaping-tank-car-boom-from-shale-oil.html
5 http://www.progressiverailroading.com/rail_industry_trends/article/
Railroads-aim-to-tap-Bakken-Shales-vast-traffic-potential--26587
6 http://www.bloomberg.com/news/2013-06-14/north-dakota-s-bakken-hits-record-oil-production-level-in-april.html
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5Shale energy: A potential game-changer Implications for US transportation & logistics industry
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Historical Projected
2010
(6,831 total
carloads)
2011
(6,963 total
carloads)
2020
(7,001 total
carloads)
Forecasted net impact of shale and coal production on
Class I carloads
Source: EIA, PwC Analysis
Note: Numbers only include shale oil carloads from wells and frac sand carloads to
shale oil and gas wells and not carloads of pipe for wells and new pipelines. Also,
the numbers assume that rail’s share of transporting shale oil as compared with
pipelines stays close to historical (and low) norms.
6,686 6,737
145 226
6,595
406
Shale oil and frac sandCoal
Railroads are also getting a boost from
the positive effects of shale on the USchemical industry, which has been
transformed into a low-cost producer
of petrochemicals. Rail is essential
to the movement of chemicals in the
United States; nearly a quarter of US
shipments of chemicals are transported
by rail.8 A recent American Chemistry
Council study found that, as of March
2013, more affordable domestic energy
has contributed to the announcement
of 97 new chemical industry projects in
the United States with an approximate value of $72 billion.9 As production
at these new plants comes online,
rail carloads of chemical products areexpected to increase as well.
In addition to the increased demand
for rail transport, the natural gas
derived from shale deposits has the
potential to provide a cheaper source
of fuel. BNSF Railway, one of the
biggest US consumers of diesel fuel,
plans to test the use of natural gas to
power its locomotives this year.10 If
successful, this could result in a signi-
cant cost reduction for rail companies.
The powering oflocomotives withnatural gas could potentially resultin a signicant costreduction for railcompanies.7
7 http://www.championgroup.com/news/worlds-largest-producer-of-natural-gas-now-its-u.s
8 http://www.americanchemistry.com/Policy/Rail-Transportation
9 http://chemistrytoenergy.com/shale-study
10 http://www.bnsf.com/employees/communications/bnsf-news/2013/march/2013-03-06-a.html
Forecasted net impact of shale and coal production on Class I carloads
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6 PwC
The low price of liqueed natural
gas (LNG) prices relative to the more
expensive diesel fuel has led many
companies to switch to vehicles run on
natural gas. UPS is a case in point with
its large eet of more than 2,700 vehi-
cles that use alternative fuel, including
liqueed natural gas and compressednatural gas engines.11 FedEx also
uses a large number of alternative-
fuel vehicles in Asia, Europe, and
Latin America.12
However, in order for trucking compa-
nies to expand their use of more
affordable fuels, there needs to be
infrastructure support. Clean Energy,
the largest provider of natural gas for
Trucking: lower-cost fuel
transportation, is building a network of
LNG truck fueling stations on interstate
highways. As part of the rst phase
of this initiative, known as America’s
Natural Gas Highway® (ANGH),
approximately 150 stations are sched-
uled to be in operation by the end of
2013.13
In addition to changing fuel dynamics,
trucking activity has increased as a
result of shale production. Trucks are
used to haul fresh water, frac sand,
waste products, and heavy equip-
ment. Longer-term, trucks will benet
from the shale-related manufacturing
renaissance in the United States.
In addition tochanging fueldynamics, truckingactivity has increased
as a result of shale production.
11 http://www.ups.com/content/us/en/bussol/browse/leadership-afvfleet.html
12 http://about.van.fedex.com/article/cleaner-vehicles
13 www.cleanenergyfuels.com/buildingamerica.html
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7Shale energy: A potential game-changer Implications for US transportation & logistics industry
If pendingapplications areapproved, US exportscould result inapproximately 3,600new LNG tankerdepartures per year.14
Shipping: poised to grow
The North American shipping industry
may become a major exporter ofnatural gas, thanks to the aggressive
drilling of shale. There are more than
20 proposed LNG export terminals
in the United States seeking permits
to allow total processing of about 30
billion cubic feet a day, according
to the United States Department of
Energy. If currently pending applica-
tions are approved, US exports could
result in approximately 3,600 new LNG
tanker departures per year.
The shipping industry could benet
from the shale boom in other ways as
well. Recently, it was announced that
gas drillers in West Virginia had made
inquiries regarding the shipment of
shale waste by barge,15 since it is less
costly than using trucks for transport.
(At this time, however, no shipments
are being allowed until the US Coast
Guard determines how to ensureenvironmental safety.) Also, shipping
is expected to play an increasing role
in the transportation of machinery and
other products needed for exploration
and production.
Furthermore, shipping will play an
increasingly important role in the
export of chemicals and manufactured
goods. The United States is becoming
a major global player in petrochemical
production, with half of new invest-ment coming from rms outside
the United States, and producing
many chemicals and plastics for the
export market.16 Longer-term, the
chemical advantage will also result in
more manufactured goods available
for export.
14 http://www.eia.gov/todayinenergy/detail.cfm?id=811
15 http://www.statejournal.com/story/20505904/ shipment-of-shale-gas-waste-liquids-awaits-coast-guard-go-ahead16 http://www.americanchemistry.com/Media/PressReleasesTranscripts/RelatedPDF/ACC-Report-Reveals-
Economic-Benefits-of-Announced-Chemical-Industry-Investments.pdf
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8 PwC
The high price of jet fuel, the singlelargest cost component for airlines,
coupled with the volatility of crude oil
prices, is spurring a search for cheaper
alternatives, such as those based on
natural gas. Qatar Petroleum and Shell
(RDSA) have completed an $18 billion
gas-to-liquid (GTL) plant that produces
jet fuel from natural gas.18 Shell is now
exploring a similar facility on the US
Gulf Coast.19 In addition, Sasol, a South
Africa energy company, announced
in late 2012 that it would build a new
GTL plant in Louisiana that will be the
second largest GTL plant in the world,
second only to the plant in Qatar.20
In 2009, Qatar Airways conducted the
rst commercial ight to be powered
by fuel derived from natural gas.21
The following year, United Airlines
conducted the rst US commercial
ight using a synthetic jet fuel blend
derived from natural gas.22 In 2012,
Boeing submitted a design proposal to
NASA for a plane designed to run on
liqueed natural gas.23
Airlines: short- and long-term opportunities
The use of natural gas for jet fuel is still years away from widespread commer-
cial use. Much depends on its pricing
in relation to the price of crude oil
as well as other possible alternative
fuels. Certainly, the impetus is there
for additional development, given
today’s environment concerns around
CO2 emissions.
In the nearer-term, airports and
airlines are beneting from the
increased trafc to and from the
major shale gas regions. For example,
ights originating in North Dakota
airports serving the Bakken shale eld
have experienced an increase in load
factors of almost 10% over the last
ve years as trafc has nearly doubled
(see chart).
Airports and airlinesare beneting fromthe increased trafcto and from themajor shale gasregions.17
17 http://www.iea.org/publications/freepublications/publication/English.pdf
18 http://oilprice.com/Energy/Natural-Gas/Qatars-Giant-Gas-To-Liquids-Plant-To-Yield-Profits-Of-6-Billion-A-Year.html
19 http:/www.shell.com/global/future-energy/natural-gas/gtl.html
20 http://www.nytimes.com/2012/12/04/business/energy-environment/sasol-plans-first-gas-to-liquids-plant-in-us.html?_r=0
21 http://www.reuters.com/article/2009/10/13/us-britain-gas-flight-idUSTRE59C1NJ20091013
22 http://www.greenaironline.com/news.php?viewStory=810
23 http://www.wired.com/autopia/2012/03/boeing-freezes-design-with-liquid-natural-gas-powerd-airliner/
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9Shale energy: A potential game-changer Implications for US transportation & logistics industry
Domestic load factors higher at North Dakota airports
Domestic load factors higher at North Dakota airports
ND
64%
66%
68%
70%
72%
74%
76%
78%
80%
82%
84%
86%
20122011201020092008
Source: US Bureau of Transportation Statistics, PwC Analysis
All
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This is an exciting time for US trans-
portation & logistics companies. As production of shale gas and oil
continues to grow, so, too, do the
opportunities. In addition to serving
shale energy production during the
drilling and completion stages of new
wells, transport is needed to move gas,
oil, and waste by-products.
Railcars, planes, and trucks are all
serving the major shale regions in
North Dakota, Ohio, and Pennsylvania.
But there are signicant shale deposits
in other areas of North America that
present additional opportunities. The
Marcellus Shale, most actively being
drilled today in Pennsylvania, spans
West Virginia, New York, Ohio, and
Maryland and is considered to have
a great deal of unrealized potential.24
It may be the second largest natural
gas eld in the world.25 Under the
Marcellus Shale is the Utica Shale,
which is thicker and even more exten-sive than the Marcellus, and covers
much of the Appalachian Basin.
The number of active oil and natural
gas rigs in the Utica Shale forma-tion doubled from 2011 to 2012,26
and seven processing plants and four
delivery pipelines valued at more than
$7 billion are under construction.27
Additional major shale plays are the
Barnett Shale in North Texas and the
Haynesville Shale in Louisiana and
Texas. The latest examples of poten-
tially abundant deposits are the Antrim
Shale that covers most of Michigan and
the Eagle Ford Shale in South Texas.28
Taking advantage of opportunities
24 http://www.iea.org/publications/freepublications/publication/English.pdf
25 anga.us/why-natural-gas/abundant/shale-plays#.UeL1PHTs
26 http://www.eia.gov/todayinenergy/detail.cfm?id=885027 www.ohio.com/blogs/drilling/ohio-utica-shale
28 anga.us/why-natural-gas/abundant/shale-plays#.UeL1PHTs
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11Shale energy: A potential game-changer Implications for US transportation & logistics industry
The shale plays in Canada are for
the most part in an earlier stage ofdevelopment than in the United
States. There are large, rich deposits
in Alberta and British Columbia, with
the most intense focus to date on the
Duvernay formation in Alberta.29
While pipelines may eventually move
the bulk of shale oil and gas, it will
take time to develop the infrastruc-
ture; and rail, trucks, and planes will
still be needed to transport people
and equipment. In the not-too-distant
future, ships will carry LNG to other
parts of the world. And, as shale
energy helps to revive the US manu-
facturing industry, it will help most
transportation modes, as they will be
needed to move products domestically
and abroad.
Transportation and logistics execu-
tives should consider the opportu-nities currently presented by the
rapid growth of shale energy. The
“winners” will develop strategic
plans that consider the impact of
shale on the overall economy and the
potential it presents for the growth
of their businesses now and for the
foreseeable future.
29 www.ogfj.com/articles/print/volume -10/issue-7/features/canadian-shale-update.html
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