Transportation Impacts Prepared for: Rail Equipment Finance - - PowerPoint PPT Presentation

Logistics Engineering Supply Chain

Shale Development:

The Evolving Transportation Impacts

Prepared for:

March 3, 2014 Rail Equipment Finance Conference 2013

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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
• Private Equity

About PLG Consulting

Shale Development: The Evolving Transportation Impacts

Partial Client List

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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

DEMAND ON RAIL CARS Shale Development: The Evolving Transportation Impacts 2010 onward 2016 onward

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Frac sand: Resurgent growth?

• Denouement of coal?
• Is “reshoring” real?
• Crude by rail:

Is it safe? Here to stay?

Burning Questions

Shale Development: The Evolving Transportation Impacts

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Correlation of Operating Rig Count with Sand and Crude Shipments

Shale Development: The Evolving Transportation Impacts

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

Operating Onshore Rigs Carloads

Operating On Shore Rigs All Sand Carloads Petroleum Carloads

* Q4 2014 UP carloads estimated * *

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U.S. Frac Sand Industry Trends

Shale Development: The Evolving Transportation Impacts

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

• Ownership shifting supply chain responsibilities –

reduced tasks by end customer

• 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

• Unit train shipping is the game-changing logistics

development – spurring investment in larger load-

• ut 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

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Sand Railcar Market Conditions

Shale Development: The Evolving Transportation Impacts

Small Covered Hoppers

• Current market described as “high demand,” “red hot”

by leasing companies



Increased frac sand per well demand, surging liquids production



Additional sand sources opening in Wisconsin



New orders from cement shippers

• Best availability is May/June 2014 (limited)
• Most likely availability is August-October 2014
• Typical full service lease rates $535 - $575



5-7 year leases



Less than 75,000 mileage caps

• Frac sand shippers/receivers will continue to move

towards more efficient methods of rail transportation



Manifest shipments require 2X the number of railcars

• vs. unit trains due to increased cycle times



Use of manifest service usually encourages use of railcar as storage at destination, further increasing fleet requirements

• Cement consumption is expected to grow by 6.4% in

2014 and 6.2% in 2015, encouraging railcar orders Proppant Consumed by Volume Freedonia Group Analysis 8/13

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Natural gas now supplying 27% of U.S. Electricity Generation

• US coal electricity generation share capture has

dropped 10% from 2006

Adversely affecting coal industry, railroad coal loadings

• 2013 coal production hit 20 year low (less than

1B s/t)

• Export opportunities diminishing due to weak

demand in Europe, declining demand and competition in Asia

Despite recent increases in prices, natural gas share capture expected to maintain or grow

• Environmental regulations of coal burning
• Scheduled coal unit retirements; 55GW

through 2020

Natural Gas Displacement of Coal for Thermal Generation

Shale Development: The Evolving Transportation Impacts

Source: EIA, February 2014

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Shale Related Rail Traffic Still Small Relative to Coal Volumes

Shale Development: The Evolving Transportation Impacts

500,000 1,000,000 1,500,000 2,000,000 2,500,000 2008 2009 2010 2011 2012 2013 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, February 2014 * Q4 2014 UP carloads estimated * * *

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Coal, Crude & Sand Trends: Carloads and Revenue

Shale Development: The Evolving Transportation Impacts

$0 $2 $4 $6 $8 $10 $12 $14 $16 $18

• 1

2 3 4 5 6 7 8 9 10 Billions Millions

Carloads Revenue

$0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 $4.0 $4.5

• 200

400 600 800 1,000 1,200 1,400 Billions Thousands

Sand Crude Revenue

STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop

Total Coal Carloads and Revenue Combined Sand and Crude Carloads and Revenue

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Natural gas has recently been ~5X cheaper than oil on a BTU-basis

• Innovation will convert more transportation fuels and
• ther energy requirements to natural gas

US electricity prices are the lowest in the industrial world

• US industries now have substantial power cost

advantage

• Electricity costs 2x higher in China, 8x higher in Europe

US gas downstream products will have world class competitiveness - are the “building blocks of manufacturing”

• Chemicals
• Resins

Natural gas is a cleaner burning fuel compared to other hydrocarbons (coal, oil)

Shale Gas Is More Important to US Industry Competitiveness Than Oil

Shale Development: The Evolving Transportation Impacts WTI & Henry Hub Natural Gas Energy Equivalent Pricing

Source: EIA, February 2014

~5X

Source: International Energy Agency, October 2013 *estimate

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US Ethane has significant structural cost advantage vs. Europe and Asia

• Europe and Asia petrochemical plants utilize oil-based

Naphtha as their feedstock

• Domestic ethane supplies to quadruple by 2025
• Prices at historic lows

NGLs (especially ethane) are basic building blocks in chemical supply chain

Low Cost NGLs Will Give US Long Term Material Cost Advantages

Shale Development: The Evolving Transportation Impacts

Source: Townsend Solutions, December 2013 Source: IHS Chemical, September 2013 Source: American Chemicals Council, February 2014

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Shale Gas Driving Steel, Methanol, & Fertilizer Manufacturing in US

Shale Development: The Evolving Transportation Impacts

Shale gas boom makes direct-reduced iron steel economical

• DRI process uses natural gas in place of coal to produce iron
• $2+B in new US projects announced
• DRI-derived steel of higher quality than that created from

recycled scrap, further driving demand

Opportunity in U.S. methanol production

• Capture price spread between low-cost natural gas and

methanol

• Methanol is a very cost-efficient way to move natural gas to

higher-value foreign markets

• US represents 10% of the global market
• U.S. imports 89% of its supply on average

Natural gas is a feedstock for ammonia production

• Represents ~70% of cash costs (CF Industries)
• 12MM mt new domestic manufacturing capacity announced

Source: GE Capital presentation, November 2013 Source: IHS Energy, September 2013

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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
• f production decreasing
• Supply will overwhelm demand

as prices approach $5 mm/btu

• US government will likely limit LNG

export to protect US from world gas market price

• Industrial use will represent only ~1/3
• f 2020 production (75B cf/d)

US Shale Gas Background and Future

Shale Development: The Evolving Transportation Impacts

Source: RBN Energy

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Source: American Chemistry Council, February 2014

>$100B of Chemical Expansion Announced

2008 2010 2012 2014 2016 2018 2020

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 and new US factories being built Phase II – Downstream products require significant processing facilities investment and lead time Phase III – About 65% of the cost of manufactured product is material cost; US material cost advantage will enable more traditional manufacturing to return to the US from low cost labor countries

SHALE GAS BOOM

Shale Gas Phased Impact To US Industrial Renaissance

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The Importance of Price Differentials to Crude by Rail

Shale Development: The Evolving Transportation Impacts

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

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

Crude by Rail Statistics

Shale Development: The Evolving Transportation Impacts

• 100,000

200,000 300,000 400,000 500,000 600,000 700,000 800,000

• 50,000

100,000 150,000 200,000 250,000 300,000 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 Petroleum & Petroleum Products (carloads/quarter) Crude Originated (carloads/quarter) Williston Crude by Rail (bbls/day) Carloads/Quarter Bbls/Day

* * Q4 2014 UP carloads estimated

WTI-Brent equilibrium 3Q3012

WTI-Brent equilibrium 3Q3013

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Shale Development and Crude By Rail: Current Market Dynamics

Shale Development: The Evolving Transportation Impacts

Adverse 3Q 2013 market forces have reversed

• WTI-Brent spread now ~$9/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



~800 bbl/day planned AB loading capacity through 2015 = 25% of production

• 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: RBN Energy, February 2014

Brent vs. WTI Spread

Source: Y Charts, February 2014

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Bakken Permian

Eagle Ford

Niobrara

East Coast Refiners Pacific Northwest Refiners California Refiners TX Gulf Coast Refiners LA Gulf Coast Refiners

Light/Sweet at TX GC Bakken (pipe): $101 Brent (ship): $111 WTI (pipe): $105 Light/Sweet at PNW Bakken (rail): $103 Brent (ship): $112 Light/Sweet at EC Bakken (rail): $105 Brent (ship): $111 Light/Sweet at LA GC Bakken (rail): $105 LLS (local): $106

Brent ANS Brent

Sources: EIA, PAALP, CIBC, CME Group, PLG analysis (Google Earth)

PADD I Demand

2,525 kbpd

PADD III Demand

8,150 kbpd

PADD V Demand

1,075 kbpd

Light/Sweet Heavy/Sour Light/Sweet Heavy/Sour Light/Sweet Heavy/Sour

$90

(wellhead)

WTI:$100 Marine Rail Pipeline

Cushing, OK Chicago, IL Clearbrook, MN

• St. James, LA

$6 Spread

• Feb. 2014

CBR Impact Brent - WTI $8.58/bbl

+

LLS - WTI $5.41/bbl

=

WTI - Bakken (Clearbrook) $4.09/bbl

=

Light/Sweet Crude Logistics and Price Differentials and CBR Impact (+ - = ) – February 2014

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Oil Sands

Hardisty, AB $76

Heavy/Sour at TX GC Mexican Maya (ship): $91 WCS (pipe): $94 WCS (rail): $100 Sources: EIA, CME Group, CIBC, PLG analysis (Google Earth)

Mexican Maya Marine

3,375 kbpd 2,525 kbpd

PADD III Demand

8,150 kbpd

PADD V Demand

Light/Sweet Heavy/Sour Light/Sweet Heavy/Sour Heavy/Sour Light/Sweet

PADD II Demand

TX Gulf Coast Refiners Pacific Northwest Refiners California Refiners Midwest Refiners Rail Pipeline

Clearbrook, MN Chicago, IL

Spread

• Jan. 2013
• Feb. 2014

Change Mexican Maya - WCS $38.07/bbl $15.45/bbl

• $22.62/bbl

Heavy/Sour Crude Logistics and Price Differentials – February 2014

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Forecast of Light Crude Railcar Supply and Demand

Shale Development: The Evolving Transportation Impacts

Light crude production increases vs. general purpose railcar capacity increases

• Significant increase in railcar capacity with the large

railcar backlog

• If pipelines and local refining can consume production

increases in Permian and Eagle Ford, light crude by rail (non Oil-Sands) will be primarily Williston Basin (Bakken)

Under best-case scenario for rail market share capture, data suggests existing & planned general purpose tank car (light crude) fleet exceeds demand Possible retrofit of “old design” railcars could dramatically decrease capacity

• Approx. 2/3 of unlined, 30K/gallon fleet would need

retrofit

Sources: CAPP, AAR, NDPA, Various Industry Sources and PLG analysis, February 2014 Assumptions:

• Williston: 80% rail market share of Williston’s projected volumes
• 39,000 tank cars in crude service for light crude in February and build rate of

12,000 railcars/year of tank cars for light crude service through end of 2015 with attrition rate of 2,500 railcars/year

• 700 bbl. average railcar capacity and average 23 day turn
• Other production sources increase at rate of 16% per year

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High Profile Accidents Changing Crude by Rail

Shale Development: The Evolving Transportation Impacts

Rail industry has a strong safety record, but optics of CBR accidents are overwhelming any positive statistics 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

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Bakken Crude Higher Volatility

Shale Development: The Evolving Transportation Impacts

Click image to watch video

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Looking Ahead: Crude By Rail SWOT

Shale Development: The Evolving Transportation Impacts

Primary strengths and opportunities

• Rapid implementation, scale up of operations, terminals, transit times
• Shorter contracts (2-3 year commitments vs. 10 years for pipeline)
• Access to coastal areas not connected via pipeline
• Origin/destination flexibility/facilitation of arbitrage opportunities
• Foundational business (i.e. refining and E&P majors who have made a

structural commitment to CBR)

• Growth in Canadian CBR

Primary threats and weaknesses

• Exposure to changing price differentials



Narrow WTI-Brent spread (EIA projects $11-12/bbl for 2014)



Adverse benchmark alignment (i.e. WTI-LLS; now ~$5 differential)



Impacts to Brent beyond US control (geopolitical events, global demand)

• Structural changes in supply



Permian and Eagle Ford supply to USGC



Water-borne Eagle Ford crude deliveries to USEC

• Continued pipeline development
• Adverse commercial consequences from recent accidents, i.e. unreasonable

timeline for tank car retrofits

• Oversupply resulting in crude prices at <$75/bbl

Supply Sources Oil Prices Destination Markets Capital

KEY DRIVERS

Logistics Engineering Supply Chain

Questions?

• Thank You !

For follow up questions and information, please contact: Graham Brisben, CEO

+1 (708) 386-0700 / gbrisben@plgconsulting.com

Taylor Robinson, President

+1 (508) 982-1319 / trobinson@plgconsulting.com