Plg rail summit 2015 04-30

Logistics Engineering Supply Chain

The North American Energy Revolution:

Implications for Rail

Prepared for:

The Rail Summit –The Supply Chain

Graham Brisben, CEO, PLG Consulting

Taylor Robinson, President, PLG Consulting

April 30, 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

Investment Advisory and

Corporate Development

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

About PLG Consulting

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

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

PLG’s Oil & Gas Industry Qualifications

The North American Energy Revolution: Implications for Rail

4

ssSource: CAPP, About Oil Sands

Source: EIA, May 2014

US Shale

Unconventional Energy Resources and Extraction Technologies


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

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

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


Source: CAPP Report, June 2014 Source: RBN Energy, December 2014

The North American Energy Revolution

6

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

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

Downstream Products

7

0

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4,000

6,000

8,000

10,000

12,000

1970

1972

1974

1976

1978

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198

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20

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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

North America now supplies 2/3 of the U.S. crude demand

0

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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)


Historical U.S. Crude Oil Production and Imports


8

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…

2014: Oversupply Has Caused Precipitous Price Declines


9

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%

~55% decline in onshore operating rigs

Conversely, Canadian oil sands producers are

completing in-process projects as they already

have significant investments made

…Shale Oil Rigs Are Falling Quickly…


0

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400

600

800

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1,200

1,400

1,600

1,800

U.S. Land Oil Rigs

Source: Baker Hughes, April 2015

4/24/15 = 676 U.S. Land Oil Rigs

10

…However, Crude Oil Production Will Continue at High Levels

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9

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


11

Source: RBN Energy, February 2015

At $50/bbl oil, producers are mostly at or below breakeven

Producer Rates of Return by Play and Product(Before Cost Reductions)


12

Producer Rates of Return by Play and Product(After Cost Reductions)


Source: RBN Energy, February 2015

Producers can be profitable at $50/bbl oil with cost reductions

13

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

2015 2016 2017 2018 2019 2020 2025

WTI (Cushing) Forecast Pricing ($/bbl)

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)

Crude Oil Price Forecast


14

NA Crude Logistics Today

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 Demand8,150

kbpd

Eagle Ford

Permian

Bakken

Rail

Pipeline

Marine

Oil Sands

GOM


15

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


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400

600

800

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1,200

20

10-Q

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4

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15-J

an&

Fe

b

U.S. Crude by Rail Volumes (kbpd)

Bakken CrudeOriginations

US CrudeOriginations

Source: NDPA, STB, PLG Analysis, April 2015

0

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-11

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y-1

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Mbbl/d

U.S. Bakken Basin Crude Production and Rail Transport (kbpd)

Production

Crude by Rail

Source: NDPA, PLG Analysis, April 2015

16

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

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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 ~$55-60 WTI priceremaining constant

Source: PLG Crude by Rail & Tank Car Forecast, Feb. 2015

Bakken Production and Takeaway Share


17

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

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)

Pipeline Build-out Remains Key Logistics Issue for Oil Sands


18

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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 $55-60 WTI priceremaining constant

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

Western Canada Production and Takeaway Share


19

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

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100

200

300

400

500

600

700

800

900

2013 2014 2015 2016 2017 2018 2019

North American Crude by Rail Volume Forecast (kbpd)

Bakken

Western Canada

Niobrara

Permian

North American CBR Forecast Overview


Note: Based on current ~$55-60 WTI priceremaining constant

20

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 specs and railway operating practices

Canada and U.S. now require Class 3 flammable liquids trains (includes crude oil) to transit high populated areas at less than 40 MPH

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" until new car specification and rules announced in May

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

Rate of new tank car orders down significantly given oil price and regulatory uncertainty

Tank CarInsulation

Top Fittings Housing

Manway

Tank Jacket

Tank Shell

Tank Head

Head Shield

Source: API with PLG simplification

Bottom Outlet Valve/Protection Skid

Industry Awaiting U.S. DOT PHMSA Decision – May 2015


21The North American Energy Revolution: Implications for Rail

CRUDE45,644

13%

ETHANOL26,920

7%

LPG20,683

6%

CHEMICAL158,424

43%

AG76,579

21%

OTHER36,595

10%

2015 CRUDE32,277

8%

ETHANOL26,795

6%

LPG21,571

5%

CHEMICAL168,269

40%

AG79,864

19%

OTHER40,566

9%

SUBJECT TO RETIREMENT, STORAGE, OR

RESTRICTED USE DUE TO

REGULATION54,055

13%

2019

Total Fleet:364,847 Total Fleet: 423,396

Total Tank Car Fleet Forecast by Market Under NPRM Option 2 and $55-$60/bbl Oil

22

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

Since 2010 2017 onward

Railcar Demand Changes From Shale Revolution



0

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era

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.S. L

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igs

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rlo

ad

s H

an

dle

d

U.S. Land Oil Rigs

Sand

Crude

Correlation of Operating Rig Count With Sand & Crude Carloads Handled

Source: Baker Hughes, STB, April 2015; Note that Sand category includes other commodities beside frac sand

24

Fracking technology changes drove 35% growth in frac sand rail movements in 2014

Nearly 100B lbs. in 2014

“High intensity” fracking is a major trend; up to 100 cars of sand 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

Frac Sand Demand


0

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20

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4

US Land Proppant Demand All Wells (billion lbs)

Source: PacWest ProppantIQ, December 2014

25

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

New-build production schedules are full through mid-2016….for now

However, significant changes on the horizon! Q1 2015 small covered hopper car orders at 131 vs. 8,627 cars during Q4 2014

Q1 2014 orders were 11,500

Overriding attitude for 2016 production is “wait and see”

Cement consumption is expected to grow by 8%+ in 2015 Cement also utilizes small covered hoppers

May be build/lease opportunities for cement cars with frac sand downturn

Plastic pellet cars market growing and competes for small hopper build capacity (large covered hoppers)

Small Covered Hoppers – Market Update


26

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”


60

65

70

75

80

85

2008 2009 2010 2011

U.S. Natural Gas Production (Bcf/day)

Actual Forecast

0

2

4

6

8

10

12

14

Natural Gas Price at Henry Hub ($/MMBTU)

Historical Futures

Source: EIA for historical and CME Group for futures as of Jan. 14, 2015

US Shale Gas Background and Future


27

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

Source: Bentek: North American NGLs 4Q2014

Shale Gas, NGLs, and Downstream Chemical Processing



Ethylene and Propylene

Ammonia and Derivatives

Methanol

Polymers and Resins

Chlor-alkali

Other

Source: American Chemistry Council and PLG analysis

Over $135B of New Shale-Related CAPEX Investments Have Been Announced

29

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

0

200

400

600

800

1,000

1,200

1,400

SaudiEthane

US Ethane USWeighted

WE LowCost

AsiaNaphtha

USNaphtha

Dec. 2013

Dec. 2014

Source: Townsend Solutions, December 2014

Cash Cost US$/ton (Ethylene)

US Chemical Industry Build-Out


30

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

Presentation Summary


Logistics Engineering Supply Chain

Thank You !For follow up questions and information,

please contact:

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

This presentation is available for download at:http://plgconsulting.com/category/presentations/

mailto:[email protected]

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Plg rail summit 2015 04-30