North American Crude By Rail Challenges and Growth Analysis - - PowerPoint PPT Presentation

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North American Crude By Rail Challenges and Growth Analysis - - PowerPoint PPT Presentation

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Engineering Supply Chain Logistics North American Crude By Rail Challenges and Growth Analysis Prepared for: Indianapolis, IN September 11, 2014 1 About PLG Consulting Partial Client List Boutique consulting firm with team members

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Logistics Engineering Supply Chain

North American Crude By Rail Challenges and Growth Analysis

Prepared for: Indianapolis, IN

September 11, 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
  • Institutional investors

About PLG Consulting

Partial Client List

North American Crude By Rail Challenges and Growth Analysis

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Deep rail industry experience

  • Operational
  • Commercial
  • Design & engineering
  • Equipment market

Broad CBR industry client experience over past 3 years

  • E&P companies
  • Refiners
  • Terminal developers
  • Investors – private equity, hedge funds, investment

banks

  • Government agencies, industry advocacy groups
  • Equipment leasing

PLG’s Crude By Rail Industry Qualifications

Diverse projects

  • 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

North American Crude By Rail Challenges and Growth Analysis

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Unconventional Energy Resources

US Shale (and Canadian) Western Canadian (WC) Oil Sands

Source: CAPP, About Oil Sands, June 2013

  • Innovative, new E&P technologies developed by

smaller entities has allowed additional hydrocarbon production in new locations; each well <$10MM

  • “Mass production” methodologies developed to

lower costs

  • Challenges -> product variability and

volatility

  • Multi-billion dollar capital investments required by

a limited number of players to set up production infrastructure

  • Open surface mining shifting to SAGD process will

harvest more bitumen over long term

  • Challenges -> distance to markets and

diluent

Source: EIA, May 2014

North American Crude By Rail Challenges and Growth Analysis

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5 PADD I Refineries PADD V Refineries PADD III Refineries

Oil Sands

PADD II Refineries Waterborne Imports Waterborne Imports Gulf of Mexico Production Alaska Production Waterborne Imports California Production

Permian Vertical Drilling

PADD III to PADD II

  • Coastal refineries mainly

supplied by waterborne imports

  • Mid-Continent supplied

from Gulf

N.A. Crude Logistics Flow Before 2010

North American Crude By Rail Challenges and Growth Analysis

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6 PADD I Refineries PADD V Refineries PADD III Refineries

Oil Sands

PADD II Refineries Waterborne Imports Gulf of Mexico Production Alaska Production Waterborne Imports California Production

Bakken Permian Eagle Ford

PADD III to PADD II Waterborne Imports

“Re-plumbing” in process

  • Pipelines are reversing,

repurposing and being built

  • CBR is a flexible, rolling

pipeline with multiple destinations

N.A. Crude Logistics Flow - 2014

North American Crude By Rail Challenges and Growth Analysis

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Shale Oil Challenges –Variability & Volatility

Shale oil is either light crude or condensate with wide variation within and between plays Issues caused by variability include:

  • Two supply streams with additional logistics

methods are sometimes necessary

  • Heavy discounting of condensate and very light
  • il as it is much less desirable to the refineries and

export volume has been limited so far

Rapidly growing light crude oversupply in the US could cause a “Day of Reckoning” at some point (2015~2020?)

  • Term coined by RBN and Turner, Mason & Co.
  • US crude oil production volume growing from

8.5M b/d to 12M b/d (2014 to 2019)

 Including ~ 1.8M b/d of condensate (2019)

  • Could cause $15-20/bbl LLS discount vs. Brent

Source: RBN Energy

Shale Development: The Evolving Transportation Impacts

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High Profile Accidents Changing Crude by Rail

Rail industry has a strong safety record, but optics of CBR accidents in past ~year overwhelm any positive statistics Regulatory approach has focused on:

  • Prevention – RR operations, track inspections, lower train speeds, increased

track-side technology, route planning requirements

  • Mitigation –Tank car engineering standards, enforcement of product testing

& classification

  • Response – Emergency response planning in case of accident

Three key links in supply chain are critical to safety:

  • At the well – increased enforcement of product testing, documentation and

traceability (FRA directive)

  • Railroad operating practices and maintenance procedures must be robust

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 and lead time

  • Tank car design regulations

DOT NPRM released July 23

60 day comment period through end of September

Expect final ruling by early 2015 Example

  • nly

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U.S. DOT NPRM Potential Impact On CBR Growth

Classification $ characterization of mined gases and liquids (minimal)

  • Was expected; most parties have already taken steps to tighten process

Rail routing risk assessment (minimal)

  • Class 1’s had already agreed to do this voluntarily
  • Given limited options in some cases will not have significant impact to actual routings

Reduced operating speeds (minimal ~ large negative)

  • 40 mph speed restriction for HHFT trains with any cars not meeting enhanced standard in:

High threat urban areas ORAreas of > 100k population OR all areas

  • If “areas of >100k population” or “all areas” is selected this could have negative impact

Enhanced braking (minimal ~ large negative)

  • If ECP braking system is required it would require large investments and modifications

Three tank car options announced for HHFT trains (minimal ~ large negative)

  • PHMSA and FRA Designed Tank Car, AAR 2014 Tank Car, Enhanced CPC 1232 Tank Car
  • 2 with shell thicknesses of 9/16”
  • NPRM expects existing 7/16” shells will meet new standard (9/16”) by adding an additional

1/8” thickness to the retrofitted jacket (no grandfathering in mentioned in NPRM)

  • Uncertainty on how many cars can actually have this performed and to what extent tank

car owners will want to retrofit

Tank Car

Insulation Top Fittings Housing Manway Tank Jacket Tank Shell Tank Head Head Shield

Source: API with PLG simplification

Bottom Outlet Valve/Protection Skid

North American Crude By Rail Challenges and Growth Analysis

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US Crude By Rail 2014 Growth Analysis

  • 200,000

400,000 600,000 800,000 1,000,000

  • 20,000

40,000 60,000 80,000 100,000 120,000 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 US Crude Originated (carloads/quarter) Bakken Crude by Rail (bbls/day) Carloads/Quarter Bakken Bbls/Day

North American Crude By Rail Challenges and Growth Analysis WTI-Brent equilibrium 3Q3013

Source: NDPA, STB, PLG Analysis, September 2014

  • Railroad performance related to severe winter and

large grain harvest

  • Slowing of crude production during severe winter
  • Decrease in CBR shipments to USGC due to pipeline

expansion

  • Delays in offloading terminals in PNW and CA

caused by environmental and permit issues

Bakken CBR lower in 2014 than predicted due to:

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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

Western Canada Oil Sands Production Processes

Mining

Source: www.epmag.com

Drilling - SAGD

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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 US and Canada

  • NEB is extending 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 will temporarily switch the flows of Alberta

Clipper and Line 3 on 17.5-mile segment across the US- Canadian border

  • Will maximize the flows under existing permits until the

Department of State review is completed on expansion

  • Increases Alberta Clipper flows by 27% to 570 kbpd by end
  • f September and potentially up to 800 kbpd in 2015

Large Canadian oil producers and pipeline companies are strategically investing in CBR as a flexible option to pipelines for the short and long term

Western Canada Crude Oil Pipelines

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)

Source: CAPP, June 2013

North American Crude By Rail Challenges and Growth Analysis

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Distance Challenge -Western Canada to US Gulf Coast

North American Crude By Rail Challenges and Growth Analysis

  • Western Canadian oil is landlocked and competes with global

waterborne crude supplies with much lower transportation costs

  • US Gulf Coast is natural home for western Canadian heavy crude
  • Up to 300 miles of feeder pipeline to rail/pipe terminals
  • Over 2,100 more miles on either pipeline or rail to US Gulf Coast
  • Long term committed pipeline has significant cost advantage vs

rail shipments of dilbit (reducing diluent amount increases rail competitiveness)

Source: Keystone XL EIS, PLG Analysis

Hardisty to US Gulf Coast Pipeline Long Term Committed Pipeline Uncommitted Dilbit Unit train Dilbit Manifest Miles 2,125 2,125 2,475 2,475 Transit time for crude (days) 20 20 8 20 Total Cost ($/bitumen bbl) $18 $25 $25 $29

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Diluent Challenge (and Possible Solution?)

Bitumen and diluent definitions

  • Bitumen - heavy, viscous oil that must be processed extensively to convert it into a crude oil

before it can be used by refineries to produce gasoline and other petroleum products

  • Diluent - lighter viscosity petroleum products that are used to dilute bitumen for

transportation in pipelines

  • Dilbit – bitumen blended with ~ 30% diluent; allows for crude to flow and meet pipeline specs
  • Railbit – bitumen blended with ~17% diluent; allows for crude to be transported by rail using

coiled and insulated tank cars

  • Purebit or Neatbit – raw bitumen with little to no diluent; special steaming equipment is

needed at loading and offloading terminals to transport in coiled and insulated tank cars

Diluent Recovery Unit (DRU)

  • Removes diluent from crude blend at the terminal before it is loaded onto railcar
  • Diluent returned to field to be reused
  • MEG Energy is planning on building a $75 M DRU as part of a 250 mile pipeline system from its

Christina Lake project to Canexus, with completion targeted for late 2015

  • Several other parties/facilities are investigating units; total cost benefit still not fully evident
  • Challenge at unloading facility if it is NOT the refinery – bitumen needs to flow via pipeline

again

Diluent penalty

  • Additional freight cost (rail cost from WC to USGC)

30% diluent vs 17% diluent: freight costs on 1.43 bbls vs. 1.20 bbls for each bbl of bitumen @$25/bbl freight costs = $5.60/ bbl of bitumen

  • Geographical difference in value of diluent

Higher value of diluent in WC vs the value you’ll receive with it blended in bitumen in US Gulf Coast

Source: CN

North American Crude By Rail Challenges and Growth Analysis

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  • 20,000

40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Canadian Crude Oil Exports by Rail (bbl per day) Bbls/day

North American Crude By Rail Challenges and Growth Analysis

Canadian Crude By Rail 2014 Growth Analysis

Source: National Energy Board (Canada), September 2014

Canadian Crude Oil Exports by Rail

  • Shutdown of Canexus Bruderhiem loading terminal due

to pipeline issues – was largest loading terminal in WC

  • Delays in opening of other unit train loading terminals in

western Canada

  • Tighter differentials between Canadian and US

landed import heavy crude prices

  • Over 100k b/d of crude is also moved within Canada

Canadian CBR lower in Q2 2014 then predicted

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Bakken and WC 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

Base Case Takeaway (kbpd)

Pipeline Crude by Rail Local Refining North American Crude By Rail Challenges and Growth Analysis

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Tailwinds

  • New WC pipelines will likely be

delayed beyond announced dates

  • Increasing Bakken & Oil Sands

production

  • Additional imports still to be

displaced in US east, west, USGC

  • More terminals coming online
  • US crude export ban easing

(condensate first)?

  • West coast export potential for WC

bitumen via rail?

N.A. Crude By Rail Future Drivers

Headwinds

  • Oversupply of light crude in the US

2014~2015 -> “Day of Reckoning”

  • Environmental hurdles at terminals

causing delays in permitting (CA, WA)

  • Tight railcar supply due to new rail car

regulations impact

  • WC pipelines will eventually be built

(2018 or beyond) and take CBR share

  • Potential regulatory backlash from

future disasters? (biggest wild card)

North American Crude By Rail Challenges and Growth Analysis

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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