ge customer webinar presentation final

Logistics Engineering Supply Chain

Crude: Resources, Regulations &

Railcars

Prepared for:

June 17, 2014

2

Boutique consulting firm with team members throughout North America Established in 2001

Over 90 clients and 250 engagements

Significant shale development practice since 2010

Practice Areas Logistics

Engineering

Supply Chain

Consulting services Strategy & optimization

Assessments & best practice benchmarking

Logistics assets & infrastructure development

Supply Chain design & operations

Hazmat training, auditing & risk assessment

M&A/investments/private equity

Industry verticals Energy

Bulk commodities

Manufactured goods

Financial services

About PLG Consulting

Crude: Resources, Regulations & Railcars

Partial Client List

3

What is behind the North American energy revolution?

Resources• N.A. shale plays

• Western Canadian oil sands

Technologies examples• Hydraulic fracturing

• Horizontal drilling

• Steam Assisted Gravity Drainage (SAGD)

• Evolving exploration and production technologies

• Tremendous productivity gains drives cost reductions

• Logistics infrastructure “re-plumbing” in

progress

• Product abundance… overabundance

• Imports displaced… exports grow

• Recoverable resources grow…sustainability

• Globally competitive power and material cost structure

• Manufacturing industries grow/return to North America

Recoverable Resources &

Enabling Technologies

Continuous Improvement

Energy Revolution


4

Unconventional Energy Resources

North America Shale Western Canada Oil Sands

Source: CAPP, About Oil Sands, June 2013


New production technology developed by small

entities allowing numerous players

“Mass production” methodologies developed

Multi-billion dollar capital investments required by

few players

Production process will harvest oil over long term

Source: EIA, May 2014

5

Convergence of hydraulic fracturing and

horizontal drilling in last five years

Fracking first used in 1947

Revolutionary advances since 2009

Yields 3-10x the initial production rate of conventional

wells

US uniquely positioned for the techniques

Private mineral rights

Drilling intensity (wells per acre)

90% of rig fleet equipped for horizontal drilling

Location of shale plays

Rapid ROI for E&P companies

Typical well earns back capital cost in 1-2 years

Depending on play productivity, “break even” price of

~$65/bbl (WTI) for oil and $3.50/Mbtu for gas

Liquid plays providing highest returns currently and a

majority of drilling rigs are focused on liquids

Oil / Gas rig count split at ~80% / 20% from ~20% / 80%

five years ago

Shale Technology Introduction

GAS OIL THERMAL

Source: Baker Hughes


6

More well bores per well pad

Directional bores to multiple shale layers

Reduced well spacing per acreage – increases well density

Zipper wells – stimulating two wells in tandem

Optimal lateral lengths

Lateral lengths had tripled since the start of horizontal drilling,

but this trend is being challenged by new practices

Zone fracturing

Micro-fracture testing at multiple points vs. one average test

that enables highest extractions of each zone

Shorter, fatter fractures

Bigger holes in casing combined with additional sand and

water use

Productivity gains continue!

Time required for drilling 15,000+ ft. well cut in half in last two years

(9 days vs. 18 days)

Eagle Ford example – new well oil production per rig has increased

by 150% over past 3 years

Lowers break even costs drive profitability improvements

New Fracking Techniques Drive Increased Production At Lower Costs

Source: Marathon, February 2014


Source: EIA Drilling Productivity Report, May 2014

7

Oil (bitumen) recovery uses two main methods

- mining and drilling (in situ)

20% of the Oil Sands reserves are close enough to the

surface to be mined using shovels and trucks (3% of oil

sands land area)

80% of the Oil Sands reserves will be recovered in situ by

drilling wells (97% of oil sands land area)

Steam Assisted Gravity Drainage (SAGD) is

most popular method

Two parallel wells are drilled

Upper well has high pressure steam continuously injected

Lower well recovers softened bitumen

Diluent is added to the bitumen (15~30%)

Diluent is very light oil or “condensate”

Enables the product to flow through pipelines and be

loaded into rail cars

Bitumen extraction has become profitable as

extraction technologies improved

Economical at ~ $ 45 - $ 65/bbl

Oil Sands Production Processes

Mining

Source: www.epmag.com

Drilling - SAGD


http://www.google.ca/url?sa=i&source=images&cd=&cad=rja&docid=SOCF1ROQEWbOwM&tbnid=FvuCLxhilXUYwM:&ved=0CAgQjRw&url=http://www.ramp-alberta.org/resources/gallery.aspx?galleryimage=965&ei=x8DpUojHFsHcoASJqILoCg&psig=AFQjCNFcddyIwCP7qtRHI-D-Y2Pc4BnO1A&ust=1391137351412286

8

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

RAIL INDUSTRY DEMAND2010 onward 2016 onward


9

U.S. Frac Sand Industry Trends

Sand33%

Rail - Freight, FSC and Eqp Lease

42%

Destination Transload &

Trucking25%

Total Delivered Cost per Ton ~ $122

Source: PLG analysis using BNSF public pricing –does not include fixed assets at origin or

destination, December 2013

Logistics costs drive ~ 67% of total

delivered sand cost

Rapid growth and maturation of both industries

(hydraulic fracturing and sand production) over the past

5 years

Sand supply base growing and consolidating at

the same time

Mines continue to open; supply base is consolidating

Large fluctuations in price of sand based on

supply/demand balance

Significant production growth beyond WI in IL and MO

due to new demand for 100 mesh sand

Unit train shipping is the game-changing logistics

development – spurring investment in larger load-out

sand transload facilities

“Benchmark” high-efficiency unit train example – Illinois

to South Texas

Single-line haul (one rail carrier), private railcars achieving two round

trips per month, origin sand facility has direct rail load-out and

destination trucking is less than 100 miles


10

Shale Gas History and Future Demand

Gas production has increased over past five years with a significantly lower gas rig count

1,000 rigs at peak down to ~300 rigs

Drilling productivity continues to increase production per well

and lower costs

And the Liquids (Crude, NGL) wells produce dry natural gas as a

by-product

Abundant US gas recoverable reserves

Low cost reserves in accessible locations near population

Marcellus gas production is the “eighth largest country” already

US will become a net gas exporter by 2020

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

Supply will overwhelm demand as prices approach $5

US government and capital constraints will likely limit LNG

export to protect US from world gas market price Source: RBN Energy, January 2014


0

10

20

30

40

50

60

70

80

0

500

1,000

1,500

2,000

2,500

Rig Count with Natural Gas Production

Gas Oil U.S. Natural Gas Production

rigs Bcf/d

Source: Baker Hughes, EIA, PLG Analysis, June 2014

11

Processing infrastructure being installed to

handle increased NGL supply

New facilities near shale plays

Domestic ethane supplies to quadruple by 2025

Exports of NGLs will continue to grow

NGLs are building blocks in chemical supply chain

US has shifted their petrochemical supply stream to >90%

ethane-based to leverage supply/cost advantage

Overabundance of NGLs Will Grow

Source: IHS Chemical, September 2013


Source: IHS Energy

12

2008 2010 2012 2014 2016 2018 2020


Source: American Chemistry Council, February 2014

>$100B of Chemical Expansion Announced

Phase I - Gas & Power-intensive Industries: Steel, Fertilizer, Methanol

Phase II - Downstream Products: Resins, Chemicals

Phase III – “Manufacturing”: Raw material cost driven

Phase I – Industries using gas as primary feedstock have global cost competitiveness; new US factories being built

Phase II – Downstream products require significant processing facilities investment and lead time

Phase III – US material cost advantage will enable traditional manufacturing to return to the North America as about 65% of the cost of manufactured product is material cost

Shale Gas Phased Impact To NA Industrial Renaissance

SHALE GAS

BOOM

13

The “Re-Plumbing” of Hydrocarbons in North America

Shift from coastal to mid-continent

supply points necessitated “re-

plumbing” the flow of carbon-based

energy in North America

Pipeline reversals, repurposing, new starts

Crude by rail comes of age – born in the Bakken

Waterborne imports being displaced as

shale oil and oil sands production

comes online

Infrastructure built rapidly to help

facilitate new energy movements

Source: Enbridge, April 2014

Oil Sands

Bakken

Eagle Ford

Permian

Marcellus

Source: EIA, PLG Analysis (Google Earth), April 2014


14

Basic Facts About Crude Oil – Grades and Qualities

Heavy/sour

Higher sulfur content, yield for asphalt & diesel

Sources include

Western Canada (largest single play in North

America)

Venezuela

Mexico, Alaska North Slope

Middle East (light/sour)

Significant investments made ($48B since 2005)

at select refineries to install coker units that will

allow processing of heavy/sour

Heavy/sour crude has a natural home in Midwest

and US Gulf Coast (~2.8 MM bpd demand at

USGC)

Light/sweet

Brent, WTI, and US shale play crudes (Bakken,

Permian, Niobrara, Eagle Ford) are light/sweet

US is close to saturation point on light/sweet

crude at mid-continent and USGC refining areas Source: RBN Energy


15

Light/Sweet Crude Logistics

Sources: EIA, PLG analysis (Google Earth)

Light/Sweet

Heavy/Sour

Pacific Northwest Refiners

California Refiners

2,525kbpd

PADD VDemand

Midwest Refiners

3,375kbpd

PADD II Demand

East Coast Refiners

PADD I Demand1,075kbpd

LA Gulf Coast Refiners

TX Gulf Coast Refiners

PADD III Demand

8,150kbpd

Bakken

Eagle Ford

Permian

ANS

Brent

Brent

Rail

Pipeline

Marine


16

Sources: EIA, PLG analysis (Google Earth)

Light/Sweet

Heavy/Sour

Pacific Northwest Refiners

California Refiners

2,525kbpd

PADD VDemand

Midwest Refiners

3,375kbpdPADD II Demand

LA Gulf Coast Refiners

TX Gulf Coast Refiners

PADD III Demand

8,150kbpd

Oil SandsHeavy/Sour Crude Logistics

Rail

Pipeline

Marine

Mexican Maya


17

Refined Products Market Dynamics

U.S. shifted to net exporter of refined

products

Mitigated the impact of declining domestic demand

International demand increasing, especially for diesel

Exports of diesel to Latin America and Europe

Gasoline exports to Latin America

Outlet for increasing domestic crude oil which

cannot be exported without being processed

Source: Valero Investor Presentation, March 2014Source: Valero Investor Presentation, March 2014

Source: Valero Investor Presentation, March 2014


18

All oil sands pipelines are under

intense scrutiny and subject to court

challenges

None of these developments will

proceed at a pace that will match

anticipated production levels

Canadian Oil Producers adopting CBR

as a risk mitigation measure to ensure

access to markets in North America

and offshore

Main driver of crude by rail out of

Western Canada will be delta between

pipeline capacity and crude oil

production

Expect Keystone XL to be built but

with more delays

Western Canada Crude Oil Pipelines

Likely Built at Some Point

Trans Mountain Express

(Kinder Morgan)

Alberta Clipper (Enbridge)

Keystone XL (TransCanada)

Unlikely

Northern Gateway

(Enbridge)

Energy East

(TransCanada)


19

Large pipeline build to Texas Gulf Coast

1.45 MMb/d added in 2012-2013 and 1.92

MMb/d to be added in 2014-2015

Large pipeline projects from Cushing including

Keystone Gulf Extension and Seaway pipelines

Other pipeline projects from Permian, Eagle

Ford, and Midwest

Bakken pipeline export capacity

Projected to increase to 715 kbpd in 2014 from

only 280 kbpd in 2010 (NDPA, Jan. ’14)

Pipeline build-out from Guernsey, WY

230 kbpd Pony Express pipeline to Cushing

(under construction)

Possibility of twinning Express-Platte pipeline

system through Guernsey to Wood River, IL

US Crude Oil Pipelines

Pipeline Capacity to Texas Gulf Coast

Source: RBN Energy, December 2013


20

Correlation of Operating Rig Count with Sand and Crude Carloads Handled

STCC 14413 (sand) and 13111 (petroleum) Source: US Rail Desktop, Baker Hughes, Surface Transportation Board, PLG Analysis, May 2014

0

500

1,000

1,500

2,000

2,500

0

50,000

100,000

150,000

200,000

250,000

2007 Avg. 2008 Avg. 2009 2010 2011 2012 2013 2014

Op

era

tin

g O

nsh

ore

Rig

s

Ca

rlo

ad

s H

an

dle

d

Operating On Shore Rigs

All Sand Carloads

Petroleum Carloads


21

Shale Related Rail Traffic Still Small Relative to Coal Volumes

0

500,000

1,000,000

1,500,000

2,000,000

2,500,0002

00

8

20

09

20

10

20

11

20

12

20

13

20

14

Sand Crude Coal

Ca

rlo

ad

s

Quarterly Data

Sand

Crude

Coal

Railcars Handled: Sand, Crude, & Coal

STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop, Surface Transportation Board, PLG Analysis, March 2014


22

0

200

400

600

800

1,000

1,200Mbbl/d ND Crude Production and Rail Transport

ND Production Crude by Rail

The Importance of Price Differentials to Crude by Rail

Differentials made rail attractive

Bakken and WTI differential as high as ~$20/bbl vs. Brent in

2012

CBR enables producers to sell at trading hubs with higher

benchmarks

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 and at destination

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

Albany, NY, Bakersfield, CA)

Lease and purchase of railcar fleets

Refineries install unit train receiving capability

Particularly coastal refineries previously captive to waterborne

imports (i.e. Philadelphia, PA, St. John, NB, Washington state)

Pipeline capacity underutilized

Rail captures 73% Bakken takeaway by April 2013

Differentials are both an incentive – and a risk –

for crude by rail

3Q 2013 a cautionary note

Source: North Dakota Pipeline Authority, January 2014, PLG Analysis

Source: North Dakota Pipeline Authority, PLG Analysis, May 2014


23

Source: AAR, North Dakota Pipeline Association, Surface Transportation Board, PLG Analysis, May 2014

Crude by Rail Statistics

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

-

50,000

100,000

150,000

200,000

250,000

300,000

Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14

Petroleum & Petroleum Products (carloads/quarter) Crude Originated (carloads/quarter) Williston Crude by Rail (bbls/day)

Carloads/Quarter Bbls/Day

WTI-Brent equilibrium

3Q3012

WTI-Brent equilibrium

3Q3013

*

*2014-Q2 quarterly rate through May 24


24

Shale Development and Crude By Rail: Current Market Dynamics

Adverse 3Q 2013 market forces have reversed

WTI-Brent spread now ~$5.50/bbl

CBR rebound driven by Bakken to coasts

Weak long-term outlook for Bakken CBR to USGC

Key driver: LLS now aligned with WTI, not Brent

“Next wave” of CBR development:

Canadian Oil Sands

Terminal investments in Alberta and PADD II and III

Over 1,300 kbbl/day planned AB loading capacity through 2015

NOT like the Bakken – more challenges

Complexities of heavy/sour product handling (steaming, diluent,

unit train challenges)

Fewer destinations

Existing – and growing – mode competition to logical markets

(pipelines and barge)

Tank car market reorienting to coiled/insulated

car types (~2/3 of CBR fleet order backlog)

Source: EIA, May 2014

Source: RBN Energy, May 2014

Brent vs. WTI Spread ($/bbl)

Crude Oil Differentials ($/bbl)


25

Announced Crude Rail Terminals Through 2017

85 load terminals

Largest and most efficient

in Bakken

69 unload terminals

Majority on the Coasts and

Mississippi River


26

Bakken and Oil Sands Crude Oil Takeaway Forecast

Source: www.CBRforecast.com

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2013 2014 2015 2016 2017 2018

Base Case Takeaway (kbpd)

Pipeline

Crude by Rail

Local Refining


27

High Profile Accidents Changing Crude by Rail

Rail industry has a strong safety record, but optics of

CBR accidents are overwhelming any positive statistics

Industry, government, media focus on tank car design

Railroad operating practices, maintenance equally

important

Railroad operating rule changes on hazmat train handling

Increased scrutiny, insurance requirements

Short line and regional railroads in particular

May have consequences in CBR freight rates

Increased product testing, documentation and

traceability (FRA directive)

Oil chemistry varies by well/pad

Concerns with extremely low flash and boiling points

Bakken terminals at varying levels of compliance


28

Bakken Crude Volatility


29

U.S. energy officials considering easing federal

laws that prohibit exports of most crude

Rising production of light oil / condensate that is not well-

matched to current U.S. refinery capacity

U.S. currently classifies condensate produced at well crude oil

and there is a possibility it be reclassified as condensate which

would allow for exports

Implications if export ban is lifted

Condensate would most likely be exported to Asia as a

petrochemical feedstock

Brent (international crude benchmark) and LLS prices would

most likely converge as they are both light crude prices on

water

“Landlocked” crude prices (ie WTI and Bakken) would most

likely rise higher closer to international prices

Export of Canadian crude via the U.S. would be simpler without

the complication of keeping U.S. diluent separate from

Canadian crude

Build out of new pipelines and terminals to export the crude

Likely a decrease in U.S. refined products export volumes and

worse economics for U.S. refineries

Possibility of Lifting Crude Oil Export Ban

Source: RBN Energy, May 2014


Logistics Engineering Supply Chain

This presentation is available at:www.plgconsulting.com/categories/presentations

-

Thank You !

For follow up questions and information, please contact:

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

http://www.plgconsulting.com/categories/presentations

ge customer webinar presentation final

Business

oil production

drilling wells

oil sands reserves

light oil

drilling sagd crude

regulations railcars

oil bitumen recovery

oil sands land area