Crude: Resources, Regulations & Railcars Prepared for: June - - PowerPoint PPT Presentation

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Engineering Supply Chain Logistics Crude: Resources, Regulations & Railcars Prepared for: June 17, 2014 About PLG Consulting Partial Client List Boutique consulting firm with team members throughout North America Established in

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Logistics Engineering Supply Chain

Crude: Resources, Regulations & Railcars

Prepared for:

June 17, 2014

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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

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What is behind the North American energy revolution?

Resources

  • N.A. shale plays
  • Western Canadian
  • il 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…
  • verabundance
  • 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

Crude: Resources, Regulations & Railcars

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Unconventional Energy Resources

North America Shale Western Canada Oil Sands

Source: CAPP, About Oil Sands, June 2013

Crude: Resources, Regulations & Railcars

  • 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

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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

Crude: Resources, Regulations & Railcars

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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

Crude: Resources, Regulations & Railcars

Source: EIA Drilling Productivity Report, May 2014

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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

Crude: Resources, Regulations & Railcars

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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 DEMAND 2010 onward 2016 onward Crude: Resources, Regulations & Railcars

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U.S. Frac Sand Industry Trends

Sand 33% Rail - Freight, FSC and Eqp Lease 42% Destination Transload & Trucking 25%

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

Crude: Resources, Regulations & Railcars

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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

Crude: Resources, Regulations & Railcars

10 20 30 40 50 60 70 80

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

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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

Crude: Resources, Regulations & Railcars

Source: IHS Energy

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2008 2010 2012 2014 2016 2018 2020

Crude: Resources, Regulations & Railcars

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

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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

Crude: Resources, Regulations & Railcars

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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

Crude: Resources, Regulations & Railcars

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Light/Sweet Crude Logistics

Sources: EIA, PLG analysis (Google Earth)

Light/Sweet Heavy/Sour

Pacific Northwest Refiners California Refiners

2,525 kbpd

PADD V Demand

Midwest Refiners

3,375 kbpd

PADD II Demand

East Coast Refiners

PADD I Demand

1,075 kbpd

LA Gulf Coast Refiners TX Gulf Coast Refiners

PADD III Demand

8,150 kbpd

Bakken Eagle Ford Permian ANS Brent Brent

Rail Pipeline Marine

Crude: Resources, Regulations & Railcars

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Sources: EIA, PLG analysis (Google Earth)

Light/Sweet Heavy/Sour

Pacific Northwest Refiners California Refiners

2,525 kbpd

PADD V Demand

Midwest Refiners

3,375 kbpd

PADD II Demand

LA Gulf Coast Refiners TX Gulf Coast Refiners

PADD III Demand

8,150 kbpd

Oil Sands

Heavy/Sour Crude Logistics

Rail Pipeline Marine

Mexican Maya

Crude: Resources, Regulations & Railcars

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

Crude: Resources, Regulations & Railcars

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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)

Crude: Resources, Regulations & Railcars

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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
  • nly 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

Crude: Resources, Regulations & Railcars

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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

500 1,000 1,500 2,000 2,500 50,000 100,000 150,000 200,000 250,000 2007 Avg. 2008 Avg. 2009 2010 2011 2012 2013 2014

Operating Onshore Rigs Carloads Handled

Operating On Shore Rigs All Sand Carloads Petroleum Carloads

Crude: Resources, Regulations & Railcars

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Shale Related Rail Traffic Still Small Relative to Coal Volumes

500,000 1,000,000 1,500,000 2,000,000 2,500,000 2008 2009 2010 2011 2012 2013 2014 Sand Crude Coal Carloads 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

Crude: Resources, Regulations & Railcars

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200 400 600 800 1,000 1,200 Mbbl/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

Crude: Resources, Regulations & Railcars

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

Crude by Rail Statistics

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

Crude: Resources, Regulations & Railcars

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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)

Crude: Resources, Regulations & Railcars

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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 Crude: Resources, Regulations & Railcars

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Bakken and Oil Sands Crude Oil Takeaway Forecast

Source: www.CBRforecast.com 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 Crude: Resources, Regulations & Railcars

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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

Crude: Resources, Regulations & Railcars

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Bakken Crude Volatility

Crude: Resources, Regulations & Railcars

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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

Crude: Resources, Regulations & Railcars

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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 / trobinson@plgconsulting.com