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PLG Consulting

This document provides a summary of a presentation by PLG Consulting about the impacts of shale development on freight transportation. It discusses how hydraulic fracturing and horizontal drilling have driven growth in natural gas and crude oil production in the US. Specifically, it addresses how shale development is affecting logistics and transportation needs for inputs like proppants, water, and chemicals to oil and gas wells. It also examines downstream impacts on industries that use natural gas, natural gas liquids, and crude oil as feedstocks. In conclusion, it considers factors that could impact future natural gas demand and prices and the potential for liquefied natural gas exports.

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Professional Logistics Group Oil & Natural Gas: The Evolving Freight Transportation Impacts Prepared for Rail Equipment Finance Conference 2013 March 5, 2013 La Quinta, CA 1
About PLG Consulting » Boutique consulting firm specializing in logistics, engineering, and supply chain  Established in 2001  Over 90 clients and 200 engagements » Headquarters in Chicago USA, with team members throughout the US and with “on the ground” experience in:  North America / Europe / South America / Asia / Middle East » Consulting services  Strategy & optimization  Assessments & benchmarking  Transportation assets & infrastructure  Logistics operations  M&A/investments/private equity » Key industry verticals:  Oil & gas  Chemicals & plastics  Wind energy & project cargo  Bulk commodities (minerals, mining, agricultural)  Industrial manufactured goods  Private equity 2
The Shale Development Revolution – Big Picture Hydraulic Fracking Destination Markets New Energy Paradigms New Key Continuous Technologies Capital Price Drivers Evolution Horizontal Drilling Logistics Rapid Change 3
Hydraulic Fracturing and Horizontal Drilling 4
Hydraulic Fracturing Equipment Staging Area Frac Tanks/Fluid Storage Data Van Chemical Trucks Blender Pump Trucks Sand Storage Unit Source: JPTOnline.org 5
US Shale Plays 6
Shale Driving Growth in Natural Gas and Crude Oil Production » 1,762 rigs in operation as of February 13, 2013 U.S. Crude Oil Production » 700% increase in shale gas production since 2007 » Domestic oil production at 14-year high (6.9MM bbl/d) » “Unconventional” becomes “conventional” by 2015 Nov. 2012 6.89MM bpd GAS OIL THERMAL Source: EIA 2012 Source: EIA 2012 Source: Baker Hughes 2013 7
Shale Development Supply Chain and Downstream Impacts Inputs >> Wellhead >> Direct Output >> Thermal >> Fuels >> Raw Materials >> Downstream Products All Manufacturing Generation Steel Process Feedstocks Proppants Fertilizer (Ammonia) Gas Home Heating (Propane) Methanol OCTG Other Fuels Chemicals NGLs Feedstock (Ethane) Chemicals Water Byproduct (Condensate) Crude Petroleum Products Cement Petrochemicals Other Fuels Gasoline » Shale development impact on the railcar industry is long-term, wide-ranging, and positive with only one exception 8
Hydraulic Fracturing Materials Inputs and Logistics – Per Well Source to Transloading to Materials Waste Water Transloading Wellhead Site ~500 Total Proppants 40 160 Truckloads OCTG (Pipe) 5 20 Chemicals 2 8 Clean Water/ Oil/Gas/NGLs Local source ~1,000 Cement Truck, Rail, 47 Total ~1,200 Total Pipeline Railcars Truckloads 9
Correlation of Operating Rig Count with Sand and Crude Shipments 120,000 2500 Operating On Shore Rigs All Sand Carloads Petroleum Carloads 100,000 1,9721,9481,965 1,911 2000 1,864 1,814 1,798 1,7631,762 1,695 1,6651,691 Operating Onshore Rigs 80,000 1,604 1,467 Sand Carloads 1500 1,270 1,299 60,000 1,073 939 1000 886 40,000 500 20,000 0 0 2007 Avg. 2008 Avg. 2009 Quarterly Data 2010 2011 2012 2013 STCC 14413 (sand) and 13111 (petroleum) Data sources: US Rail Desktop, Baker Hughes 10
All Sand Handled by Railroad 40,000 35,000 30,000 25,000 Carloads BNSF UP 20,000 NS CN 15,000 CPRS CSXT 10,000 KCS 5,000 0 2008 2009 2010 2011 2012 Quarterly Data STCC 14413 Source: US Rail Desktop 11
Sand Mining Overcapacity: New Reality » Growth in Wisconsin sand mining industry has slowed  60 mine/processing operations proposed June 2011 – June 2012  Four (4) proposed June 2012 – January 2013 » Minnesota opposition to sand mining grows  Pattison (Prairie du Chien, WI) asked to withdraw permit application  MN state senate committee has passed a one-year mining moratorium » Transportation costs continue to concern WI and MN sand shippers » Established Illinois companies seeing significant upturns in volumes and financial returns » Industry consolidation continues 12
Changes in Rail Shipment Pricing 2012 / 2013 - Sand » Pricing spreads continue to widen between unit train and manifest shipments  On a per-ton basis between Wisconsin and Texas, spreads are 17-29% » Shippers who are willing to ship unit trains and make volume commitments have realized significant savings with longevity over public pricing » Western carriers are driving single line hauls and encouraging longer trains to Eagle Ford via pricing differentials » Canadian and Eastern carriers are aggressively working to grow their markets by providing very competitive pricing and securing sand originations  CN/Superior Silica Sands – Poskin (Barron), WI » Major sand providers establishing “in the play” transloading facilities to provide ready access to product  U.S. Silica - East Liverpool, OH  U.S. Silica – San Antonio, TX  Potential 2nd facility under consideration in San Antonio, TX Source: PLG analysis 13
Processed Sand Total Delivered Cost » Benchmark cost with well-executed » Potential for significant cost add- performance ons caused by strategic and  Example unit train movement from Wisconsin to Texas with total delivered cost of approx. $180/ton tactical issues  Logistics drives ~60% of total delivered sand cost  Sub-optimal logistics network design or infrastructure  Manifest service (rail)  Multi-carrier vs. single line haul (rail)  Equipment/driver shortages  Poor planning and/or execution  Rail and/or truck demurrage costs – Performance penalties  Uncompetitive sand price  Poor sand quality Source: PLG analysis 14
Sand Railcar Market Conditions » New-build market has run its course  Much smaller backlog – 3Q 2011: 10,000 cars, ten month wait – Today: no significant wait  Significant drop off from ~14,000 new cars per year – 2013 closer to 2,000-3,000 new cars  No new spec building by lessors – all deal specific now  Normalized pricing: older cars less expensive than new  Some new cars going into storage » Lease market also post-peak  Available inventory from multiple directions – Lessors, builders, oversubscribed shippers  Existing 286K cars available now  Cars with sub-optimal specs (grain, <286K, cement) are being phased out of frac sand fleet  Credit-worthiness an important criteria » Long-term horizon  Some signs of activity in cement market may help offset remaining surplus of sand cars  Optimism in industry that sand car demand will strengthen in Q3-Q4 2013 15
Shale Play Product Flows Outbound » Natural Gas  Majority via pipelines, some trucks » Natural Gas Liquids (NGLs)  Requires processing (fractionation)  3-9 gallons/MCF (thousand cubic feet) – Ethane 63% – Propane 22% – Butane 8% – Pentane 5% – Other 2% – Condensate (liquid hydrocarbons) » Crude Oil  Bakken play as a model  Surging Permian and Eagle Ford development 16
Shale Development Natural Gas Impacts - Thermal » Industry a “victim of its own success”  Fracking results in oversupply; gas prices down 50% since 2010  Rigs leave Marcellus, other gas plays for oil plays  Helped to deflate frac sand boom » Significant displacement of coal for electricity generation  Natural gas now supplying approx. 30% of thermal fuel Source: EIA demand  Adversely affecting coal industry, railroad coal loadings Source: NYMEX 17
Shale Related Rail Traffic Still Small Relative to Coal Volumes Rail Shipments: Coal, Sand & Crude 2,500,000 2,000,000 Carloads 1,500,000 1,000,000 500,000 0 Sand 2008 Crude 2009 Coal 2010 2011 2012 Quarterly Data STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop 18
Coal, Crude & Sand Trends: Carloads and Revenue Coal Shipments Crude & Sand Shipments Carloads Revenue Sand Crude Revenue 8 $18 400 $2.0 Millions Thousands Billions Billions $16 350 $1.8 $1.6 7.5 $14 300 $1.4 $12 250 $1.2 Carloads 7 $10 200 $1.0 150 $0.8 $8 6.5 $0.6 $6 100 $0.4 $4 50 $0.2 6 $2 0 $0.0 5.5 $0 20082009201020112012 STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop 19
Shale Gas Driving US Manufacturing Renaissance » Huge upside for domestic manufacturing from low-cost electricity generation  “Re-shoring” due to low electricity prices  Benefits ALL manufacturing in US » Certain industries that use natural gas as a feedstock poised for a renaissance  Methanol – 16MM m/t new capacity under consideration  Fertilizer  Steel » Broad implications for a wide variety of railcar types 20
Shale Gas Will Drive Steel Manufacturing Comeback in US » Shale gas boom makes direct-reduced iron steel economical  DRI plants viable with growth in shale gas  Not new technology, but preferable with lower cost natural gas  DRI process uses natural gas in place of coal to produce iron  Cost of production 20% lower per ton vs. traditional blast furnace » U.S. jobs and international investment  Steel production in the U.S has shrunk 3.4% since 2008 – Compare to 14% growth in steel production internationally – Domestic steel industry capacity running at 74%  At least five new DRI steel plants being considered in the U.S. – now economical for the first time in 30 years due to low cost of natural gas  Both domestic and international firms investing in the technology  Initial investments create up to 500 jobs and 150 permanent employees » Reciprocal growth  Increased demand for U.S. steel creates greater demand for U.S. gas  Joint venture between Nucor Corp. and Encana Corp. commits $3 billion to development of new gas wells to support DRI plants  DRI-derived steel of higher quality than that created from recycled scrap, further driving demand 21
Shale Gas Development Impact on Fertilizer Market » Natural gas is a feedstock for ammonia production » Lower gas prices directly benefit American farmers  Increased demand for corn, soybeans has driven fertilizer costs higher  Excess natural gas supply can be utilized to produce greater volumes of fertilizer more economically  Economic advantage of domestic production vs. imports for the first time in 20+ years due to low gas prices from fracking » Cheap U.S. natural gas means billions in investment for new domestic fertilizer plants, displacing imports  Orascom/Iowa Fertilizer Company - Wever, IA  CHS - Spiritwood, ND  Ohio Valley Resources - Spencer County, IN  Yara - Belle Plaine, SK Canada  North Dakota Grain Growers Association - Williston Basin, ND  CF Industries – expansions at Donaldsonville, LA and Port Neal, IA  PotashCorp - resumption of ammonia production at Geismar, LA  Agrium – KY or MO (anticipated) » If new plant construction/expansions are completed, imports of nitrogen-based fertilizers could be reduced to “near zero” by 2018 22
Looking Ahead: Natural Gas » Factors that could revive demand and prices (>$4/MMbtu)  Industrial use expansions come online over next 5 years  Continued toughening of EPA regulations of coal  Historic import/export reversal of US/Canada natural gas flows by 2014 (Marcellus gas exports to Canada)  Technology advancements for increased use of CNG as a transportation fuel Source: Union Gas, RBN Energy » Potential for LNG exports  Political/policy battle between domestic industrial users and producers  Sabine Pass, LA now permitted for exports; more terminals in application phase  Expect only moderate volumes of LNG exports to be approved – Avoids exposure of natural gas to similar market forces that have affected oil – Useful foreign policy instrument for Executive Branch » Expect any significant revival of dry gas fracking to re-ignite frac sand car market, transportation Source: Waterborne Energy Inc. Data in $US/MMBtu 23
Shale Development NGL Impacts » Leading NGL and “wet gas” plays are Eagle Ford, Utica, Permian  Significant investment and expansion of gathering, fractionation, and takeaway capacity underway in the Utica Play  Takeaway capacity in Eagle Ford well exceeds current production (4x) » Requires fractionation facilities proximal to production  “Y-grade” must be separated into purified products  75% of fractionation capacity in US Gulf Coast  Mt. Belvieu, TX major trading & storage hub » Similar to dry gas, strong production due to fracking has HDPE Calculated Cost resulted in oversupply and depressed prices 2500 2000 $/Ton 1500 » However, also similar to dry gas, abundant supplies have sparked chemical industry renaissance 1000  Ethane is “cracked” to make ethylene, the most basic building block in the 500 chemicals supply chain 0  Over $15B in new announced ethylene expansions will come on-line over the next five years, increasing capacity by 33% (11 MMmt)  USA is now the low-cost producer of ethylene-based chemicals due to abundant supplies of ethane from shale plays (up to 60% raw materials cost advantage) Sources: CMAI, TopLine Analytics, and Alembic analysis, 2012 24
Natural Gas & Petrochemical Downstream Products Feedstock/ Intermediary Low-Density Food packaging, film, Finished Polyethylene trash bags, diapers, toys Products House wares, crates, High Density drums, food containers, Polyethylene bottles. Siding, windows, Ethylene Vinyl Chloride PVC frames, pipe, medical Dichloride tubing Antifreeze Pantyhose, Natural Gas, Ethylene Ethylene carpets, clothing Fibers OIl Oxide Glycol PET Miscellaneous Bottles, film Ethane, Ethyl Polystyrene Styrene Naphtha, etc. Benzene SAN Insulation, cups SBR Linear Latex Instrument lenses, Detergents house wares Ethylene Alcohols Miscellaneous Vinyl Acetate Tire, hose Adhesives, coatings, textile/ paper. finishing, flooring Medical gloves, Miscellaneous carpeting, coatings
Looking Ahead: NGLs » The (somewhat) hidden Condensate story  Used as diluent for heavy Canadian tar sands oil – critical for transportation as “Dilbit”  Trades at ~$110/bbl at Edmonton  Significant investment in infrastructure being made to deliver Eagle Ford, Utica condensate to Western Canada  Primary delivery via pipeline, but major rail volumes ex. Utica are required to get to Midwest pipeline injection points  Additional stressor on tight tank car supplies  Demand expected to grow from 200 MMb/d to 500 MMb/d by 2020 » Expect export market for NGLs to expand Source: Canadian Energy Research Institute  Pipeline reversals undertaken to meet demand, particularly ex. Utica to Sarnia, ON petrochemical complex and export storage and dock facilities in Philadelphia » Continued strong NGL production will drive chemical industry growth  Domestic end-use of materials, i.e. plastics, will expand significantly  Up to 40% of new petrochemical output will be for export  New demand for plastic resin hoppers, specialty and pressure tank cars Source: MarkWest, Rextag 26
Shale Development Crude Oil Impacts » Dramatic increases in US production due to fracking  Projected to grow by ~30% over next four years  Strong play in Bakken; surging Permian and Eagle Ford development » Decreasing dependency on foreign crude Source: Morgan Stanley, February 2013 Source: Morgan Stanley, February 2013  Combination of US shale plus Canadian oil sands estimated to reduce imports to <15% by 2020  West African imports already down ~70% from 2010 levels » Rail critical to total crude market  Bakken as case study Source: BENTEK Energy 27
Bakken Oil Production – History and Forecast 600000 ~704,000 BPD December 2012 500000 400000 Barrels Per Day 300000 First outbound unit train 200000 shipment December, 2009 100000 0 1952 1962 1972 1982 1992 2002 2012 Year Source: North Dakota Industrial Commission, North Dakota Department of Mineral Resources - Source: North Dakota Oil and Gas Division January 2013 January 2013 28
Bakken Crude No Longer “Stranded” Due to Logistics ND Crude Production and Rail Transport » Change in past 15 months 800,000 700,000  November 2011: 600,000 – 2012 Bakken discount vs. WTI have ranged from 500,000 $8-12 bbl 400,000 – Undervalued due to logistics constraints 300,000 “stranding” the oil 200,000  January 2013: 100,000 – Bakken vs. WTI near even to ~$4 discount due to 0 improved logistics Dec. 2010 Dec. 2011 Jun-12 Aug-12 Oct-12 Dec-12 ND Production (bpd) Crude by Rail (bpd) Source: North Dakota Industrial Commission, PLG analysis » Significant expansion of crude by rail terminal capacities in 2011- 2012, but slowing in 2013  Increasing M&A activity, private equity interest in infrastructure 29 29
Crude Oil by Rail – North Dakota Terminals (Existing by December 2012 and planned for 2013) Loading Capacity Rail Facility Location (Barrels per Day) Carrier Musket Corp Dore 60,000 BNSF Savage Services Trenton 90,000 BNSF Red River Supply Williston 10,000 BNSF Hess Oil Tioga 60,000 BNSF Plains All American Manitou 65,000 BNSF Bakken Transload (Plains) Ross 20,000 (65k Q2 2013) BNSF EOG Stanley 65,000 BNSF Basin Transload Zap 40,000 BNSF Bakken Oil Express Dickinson 100,000 BNSF Enserco Gascoyne 10,000 (60k Q2 2013) BNSF Inergy Partners Epping 120,000 BNSF Enbridge Berthold 10,000 (60k Q2 2013) BNSF Great Northern Fryburg 65,000 BNSF BNSF Total Capacity 715,000 Global Stampede 60,000 CP Dakota Plains New Town 40,000 CP Plains All American Van Hook 35,000 (65k Q2 2013) CP CP Rail Total Capacity 135,000 Total Crude by Rail Capacity 850,000 Source: PLG analysis 30
North Dakota Class I Railroads and Crude Oil Terminals Map by PLG Consulting Source: RBN Energy 31 31
Bakken Area Outbound Pipelines Current Capacity ( Q1 2013) - 440,000 bpd Announced pipeline capacity expansions Company Project BBL's/day Expected in Name Capacity service date Enbridge Berthold Expansion 145,000 1Q 2013 Sandpiper 225,000 2016 Plains All American Bakken North 75,000 1Q 2013 Saddle Butte High Prairie 160,000 1Q 2014 Oneok Partners Bakken Express 200,000 2015 Bakken Express ‘postponed’ November 30, 2012 due to lack of Trans Canada Bakken Marketlink 100,000 2015 subscription Keystone XL 830,000 2015? Total New Pipelines: 1,535,000 NEW pipeline capacity expected operational: 2013 220,000 2014 160,000 2015 325,000 TBD (K XL) 830,000 Bpd = Barrels per Day Source: PLG analysis, North Dakota Governors Pipeline Summit 2012, ND Pipeline Authority Jan 2013 32 32
Bakken Production vs. Takeaway Capacity: 2012–2014 Projection Total Excess Year ND Production Pipeline Rail Terminal Rail Carrier ND Refinery Outbound & Logistics Forecast (Bpd) Capacity* Capacity Capacity Consumption Refinery Capacity Capacity 2012 700,000 460,000 670,000 1,200,000 60,000 1,190,000 490,000 2013 790,000 650,000 880,000 1,300,000 60,000 1,590,000 800,000 2014 860,000 900,000 880,000 1,350,000 60,000 1,840,000 980,000 * Excludes Keystone XL Bpd = Barrels per Day Source: PLG Analysis 33
Crude Oil Pipelines – Existing and Future Source – CAPP Report 2011 34
Crude Oil by Rail vs. Pipeline » Current pipeline options ~ 30-45% lower cost vs. rail » Near-term offsetting rail advantages:  Site permitting, construction is much quicker and easier  Much lower capital cost and scalable  Shorter contracts  Transit to destination - 5-7 days via unit train vs. 30+ days via pipeline (between Bakken and US Gulf Coast)  Origin and destination flexibility/opportunistic to new $16.00 $14.70 $14.00 markets $11.50 Dollars Per Barrel $12.00 $10.50 » Long-term challenges that will affect rail $10.00 volumes and margins: $8.00 $6.50 $6.00  Pipeline expansions $4.00 $2.00  Bakken-WTI price equilibrium $-  Any significant narrowing of price differential between Pipeline to Rail to Cushing Pipeline to Pt Rail to Pt Cushing Arthur Arthur Brent and WTI Source: PLG analysis 35
Crude Oil by Rail Volume Growth 50,000 45,000 40,000 35,000 Carloads 30,000 BNSF UP 25,000 CPRS 20,000 CN CSXT 15,000 KCS NS 10,000 5,000 0 2008 2009 2010 2011 2012 Quarterly Data Source - US Rail Desktop 36
Shale Development Impact on Crude Oil Market Dynamics Destination » Crude oil will find its way to market one way or Markets another  Price differentials Capita Key Price – Bakken and WTI trading at ~$20/bbl less than Brent l Drivers – Alberta Bitumen trading at ~$40/bbl less than Brent  E&P, midstream players willing to rapidly deploy significant capital to enable access Logistics – Multi-modal logistics hubs in shale plays – New multi-modal terminals/trading hubs at destination markets (i.e. Cushing, OK, St. James, LA, Pt. Arthur, TX, Albany, NY, Bakersfield, CA) – Lease and purchase of railcar fleets – Pipeline expansions, reversals, new construction  Refineries installing unit train receiving capability – Particularly coastal refineries previously captive to waterborne imports (i.e. Philadelphia, PA, St. John, NB, Anacortes, WA, Ferndale, WA) » However, not all crudes are created equal  Light/sweet vs. heavy/sour – Brent, WTI, and US shale play crudes (Bakken, Permian, Niobrara, Permian) are light/sweet – Heavy/sour crudes include Western Canada, Venezuela, Mexico, Alaska North Slope (ANS), Middle East (light/sour) – Light/sweet requires less downstream processing – Heavy/sour has higher sulfur content 37 37 – Bakken has higher gas, jet, and distillate yield than peer crudes
Shale Development Impact on Crude Oil Market Dynamics (continued) » Refineries are generally configured to run certain types of crude  Significant investments made ($48B since 2005) at select refineries to install coker units that will allow processing of heavy/sour  Major heavy/sour refining clusters: Corpus Christi, Houston, Chicago, southern Illinois, Ohio, West Coast » The special case of the Canada Oil Sands  Heavy/sour crude has a natural home in Midwest and US Gulf Coast  Pipeline capacity to US Midwest refining centers is at capacity  As Canada waited for pipelines, Bakken built rail infrastructure to provide 50+% of takeaway capacity  Pipeline developments to coasts, US markets still 2+ years away, while tank car supply constrains rail options  Alberta producers’ opportunity cost at $60MM/day due to Bitumen discounting  Province of Alberta receives 25% of its $40B annual budget from oil royalties Source: PLG Consulting 38 38
Shale Development Impact on Crude Oil Market Dynamics (continued) » The gusher of new US light/sweet shale oil production made possible by fracking has upended the traditional oil logistics and trading patterns  Result: “Wrong place/wrong oil” supply displacements, i.e. Cushing overflow  Rapid investment in new logistics infrastructure, routes, modes, and terminals  The biggest current bottleneck: Railcars – Current order backlog runs to 3Q 2014 – Major purchases by oil majors and midstream companies – Extremely tight market with very high lease rates » A “new normal” in crude oil flows will emerge in conjunction with continued North American oil production over the next five years 39 39
Looking Ahead: Crude Oil Production Growth and Anticipated Product Flows = Light/Sweet = Heavy/Sour Oil Sands 1,615 +2,300 Bakken 704 +855 Permian 514 +607 = Storage terminal(s) = Pipeline = Refinery cluster – Sweet/Intermediate Eagle Ford = Marine = Refinery cluster – 352 Sour/Intermediate +1,087 = Rail 123 = Current b/d (000) 40 +420 = Future b/d (000) additional by 2017 Source: BENTEK Energy, CAPP, Railroad Commission of Texas, PLG Consulting
The Shale Development Revolution – Big Picture for the Railcar Industry Crude Cars New Energy Paradigms Capital Downstream Price Look Beyond Today Opportunities Expect Change Small Cube Hoppers Logistics Rapid Change 41
Professional Logistics Group Thank You! For follow up questions and information, please contact: Taylor Robinson, President +1-508-982-1319 / trobinson@prologisticsgroup.com Graham Brisben, CEO +1-708-386-0700 / gbrisben@prologisticsgroup.com Jean Arndt, Vice President +1-630-505-0273 / jarndt@prologisticsgroup.com Jeff Dowdell, Senior Consultant +1-732-995-6696 / jdowdell@prologisticsgroup.com Gordon Heisler, Senior Consultant +1-215-620-4247 / gheisler@prologisticsgroup.com Jeff Rasmussen, Senior Consultant +1-317-379-5715 / jrasmussen@prologisticsgroup.com Eric Lamy, Business Manager +1-508-633-3993 / elamy@prologisticsgroup.com Jay Olberding, Analyst +1-636-399-5628 / jolberding@prologisticsgroup.com This presentation is available at: WWW.PROLOGISTICSGROUP.COM 42

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Plg refc presentation 030513 final

  • 1. Professional Logistics Group Oil & Natural Gas: The Evolving Freight Transportation Impacts Prepared for Rail Equipment Finance Conference 2013 March 5, 2013 La Quinta, CA 1
  • 2. About PLG Consulting » Boutique consulting firm specializing in logistics, engineering, and supply chain  Established in 2001  Over 90 clients and 200 engagements » Headquarters in Chicago USA, with team members throughout the US and with “on the ground” experience in:  North America / Europe / South America / Asia / Middle East » Consulting services  Strategy & optimization  Assessments & benchmarking  Transportation assets & infrastructure  Logistics operations  M&A/investments/private equity » Key industry verticals:  Oil & gas  Chemicals & plastics  Wind energy & project cargo  Bulk commodities (minerals, mining, agricultural)  Industrial manufactured goods  Private equity 2
  • 3. The Shale Development Revolution – Big Picture Hydraulic Fracking Destination Markets New Energy Paradigms New Key Continuous Technologies Capital Price Drivers Evolution Horizontal Drilling Logistics Rapid Change 3
  • 4. Hydraulic Fracturing and Horizontal Drilling 4
  • 5. Hydraulic Fracturing Equipment Staging Area Frac Tanks/Fluid Storage Data Van Chemical Trucks Blender Pump Trucks Sand Storage Unit Source: JPTOnline.org 5
  • 7. Shale Driving Growth in Natural Gas and Crude Oil Production » 1,762 rigs in operation as of February 13, 2013 U.S. Crude Oil Production » 700% increase in shale gas production since 2007 » Domestic oil production at 14-year high (6.9MM bbl/d) » “Unconventional” becomes “conventional” by 2015 Nov. 2012 6.89MM bpd GAS OIL THERMAL Source: EIA 2012 Source: EIA 2012 Source: Baker Hughes 2013 7
  • 8. Shale Development Supply Chain and Downstream Impacts Inputs >> Wellhead >> Direct Output >> Thermal >> Fuels >> Raw Materials >> Downstream Products All Manufacturing Generation Steel Process Feedstocks Proppants Fertilizer (Ammonia) Gas Home Heating (Propane) Methanol OCTG Other Fuels Chemicals NGLs Feedstock (Ethane) Chemicals Water Byproduct (Condensate) Crude Petroleum Products Cement Petrochemicals Other Fuels Gasoline » Shale development impact on the railcar industry is long-term, wide-ranging, and positive with only one exception 8
  • 9. Hydraulic Fracturing Materials Inputs and Logistics – Per Well Source to Transloading to Materials Waste Water Transloading Wellhead Site ~500 Total Proppants 40 160 Truckloads OCTG (Pipe) 5 20 Chemicals 2 8 Clean Water/ Oil/Gas/NGLs Local source ~1,000 Cement Truck, Rail, 47 Total ~1,200 Total Pipeline Railcars Truckloads 9
  • 10. Correlation of Operating Rig Count with Sand and Crude Shipments 120,000 2500 Operating On Shore Rigs All Sand Carloads Petroleum Carloads 100,000 1,9721,9481,965 1,911 2000 1,864 1,814 1,798 1,7631,762 1,695 1,6651,691 Operating Onshore Rigs 80,000 1,604 1,467 Sand Carloads 1500 1,270 1,299 60,000 1,073 939 1000 886 40,000 500 20,000 0 0 2007 Avg. 2008 Avg. 2009 Quarterly Data 2010 2011 2012 2013 STCC 14413 (sand) and 13111 (petroleum) Data sources: US Rail Desktop, Baker Hughes 10
  • 11. All Sand Handled by Railroad 40,000 35,000 30,000 25,000 Carloads BNSF UP 20,000 NS CN 15,000 CPRS CSXT 10,000 KCS 5,000 0 2008 2009 2010 2011 2012 Quarterly Data STCC 14413 Source: US Rail Desktop 11
  • 12. Sand Mining Overcapacity: New Reality » Growth in Wisconsin sand mining industry has slowed  60 mine/processing operations proposed June 2011 – June 2012  Four (4) proposed June 2012 – January 2013 » Minnesota opposition to sand mining grows  Pattison (Prairie du Chien, WI) asked to withdraw permit application  MN state senate committee has passed a one-year mining moratorium » Transportation costs continue to concern WI and MN sand shippers » Established Illinois companies seeing significant upturns in volumes and financial returns » Industry consolidation continues 12
  • 13. Changes in Rail Shipment Pricing 2012 / 2013 - Sand » Pricing spreads continue to widen between unit train and manifest shipments  On a per-ton basis between Wisconsin and Texas, spreads are 17-29% » Shippers who are willing to ship unit trains and make volume commitments have realized significant savings with longevity over public pricing » Western carriers are driving single line hauls and encouraging longer trains to Eagle Ford via pricing differentials » Canadian and Eastern carriers are aggressively working to grow their markets by providing very competitive pricing and securing sand originations  CN/Superior Silica Sands – Poskin (Barron), WI » Major sand providers establishing “in the play” transloading facilities to provide ready access to product  U.S. Silica - East Liverpool, OH  U.S. Silica – San Antonio, TX  Potential 2nd facility under consideration in San Antonio, TX Source: PLG analysis 13
  • 14. Processed Sand Total Delivered Cost » Benchmark cost with well-executed » Potential for significant cost add- performance ons caused by strategic and  Example unit train movement from Wisconsin to Texas with total delivered cost of approx. $180/ton tactical issues  Logistics drives ~60% of total delivered sand cost  Sub-optimal logistics network design or infrastructure  Manifest service (rail)  Multi-carrier vs. single line haul (rail)  Equipment/driver shortages  Poor planning and/or execution  Rail and/or truck demurrage costs – Performance penalties  Uncompetitive sand price  Poor sand quality Source: PLG analysis 14
  • 15. Sand Railcar Market Conditions » New-build market has run its course  Much smaller backlog – 3Q 2011: 10,000 cars, ten month wait – Today: no significant wait  Significant drop off from ~14,000 new cars per year – 2013 closer to 2,000-3,000 new cars  No new spec building by lessors – all deal specific now  Normalized pricing: older cars less expensive than new  Some new cars going into storage » Lease market also post-peak  Available inventory from multiple directions – Lessors, builders, oversubscribed shippers  Existing 286K cars available now  Cars with sub-optimal specs (grain, <286K, cement) are being phased out of frac sand fleet  Credit-worthiness an important criteria » Long-term horizon  Some signs of activity in cement market may help offset remaining surplus of sand cars  Optimism in industry that sand car demand will strengthen in Q3-Q4 2013 15
  • 16. Shale Play Product Flows Outbound » Natural Gas  Majority via pipelines, some trucks » Natural Gas Liquids (NGLs)  Requires processing (fractionation)  3-9 gallons/MCF (thousand cubic feet) – Ethane 63% – Propane 22% – Butane 8% – Pentane 5% – Other 2% – Condensate (liquid hydrocarbons) » Crude Oil  Bakken play as a model  Surging Permian and Eagle Ford development 16
  • 17. Shale Development Natural Gas Impacts - Thermal » Industry a “victim of its own success”  Fracking results in oversupply; gas prices down 50% since 2010  Rigs leave Marcellus, other gas plays for oil plays  Helped to deflate frac sand boom » Significant displacement of coal for electricity generation  Natural gas now supplying approx. 30% of thermal fuel Source: EIA demand  Adversely affecting coal industry, railroad coal loadings Source: NYMEX 17
  • 18. Shale Related Rail Traffic Still Small Relative to Coal Volumes Rail Shipments: Coal, Sand & Crude 2,500,000 2,000,000 Carloads 1,500,000 1,000,000 500,000 0 Sand 2008 Crude 2009 Coal 2010 2011 2012 Quarterly Data STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop 18
  • 19. Coal, Crude & Sand Trends: Carloads and Revenue Coal Shipments Crude & Sand Shipments Carloads Revenue Sand Crude Revenue 8 $18 400 $2.0 Millions Thousands Billions Billions $16 350 $1.8 $1.6 7.5 $14 300 $1.4 $12 250 $1.2 Carloads 7 $10 200 $1.0 150 $0.8 $8 6.5 $0.6 $6 100 $0.4 $4 50 $0.2 6 $2 0 $0.0 5.5 $0 20082009201020112012 STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop 19
  • 20. Shale Gas Driving US Manufacturing Renaissance » Huge upside for domestic manufacturing from low-cost electricity generation  “Re-shoring” due to low electricity prices  Benefits ALL manufacturing in US » Certain industries that use natural gas as a feedstock poised for a renaissance  Methanol – 16MM m/t new capacity under consideration  Fertilizer  Steel » Broad implications for a wide variety of railcar types 20
  • 21. Shale Gas Will Drive Steel Manufacturing Comeback in US » Shale gas boom makes direct-reduced iron steel economical  DRI plants viable with growth in shale gas  Not new technology, but preferable with lower cost natural gas  DRI process uses natural gas in place of coal to produce iron  Cost of production 20% lower per ton vs. traditional blast furnace » U.S. jobs and international investment  Steel production in the U.S has shrunk 3.4% since 2008 – Compare to 14% growth in steel production internationally – Domestic steel industry capacity running at 74%  At least five new DRI steel plants being considered in the U.S. – now economical for the first time in 30 years due to low cost of natural gas  Both domestic and international firms investing in the technology  Initial investments create up to 500 jobs and 150 permanent employees » Reciprocal growth  Increased demand for U.S. steel creates greater demand for U.S. gas  Joint venture between Nucor Corp. and Encana Corp. commits $3 billion to development of new gas wells to support DRI plants  DRI-derived steel of higher quality than that created from recycled scrap, further driving demand 21
  • 22. Shale Gas Development Impact on Fertilizer Market » Natural gas is a feedstock for ammonia production » Lower gas prices directly benefit American farmers  Increased demand for corn, soybeans has driven fertilizer costs higher  Excess natural gas supply can be utilized to produce greater volumes of fertilizer more economically  Economic advantage of domestic production vs. imports for the first time in 20+ years due to low gas prices from fracking » Cheap U.S. natural gas means billions in investment for new domestic fertilizer plants, displacing imports  Orascom/Iowa Fertilizer Company - Wever, IA  CHS - Spiritwood, ND  Ohio Valley Resources - Spencer County, IN  Yara - Belle Plaine, SK Canada  North Dakota Grain Growers Association - Williston Basin, ND  CF Industries – expansions at Donaldsonville, LA and Port Neal, IA  PotashCorp - resumption of ammonia production at Geismar, LA  Agrium – KY or MO (anticipated) » If new plant construction/expansions are completed, imports of nitrogen-based fertilizers could be reduced to “near zero” by 2018 22
  • 23. Looking Ahead: Natural Gas » Factors that could revive demand and prices (>$4/MMbtu)  Industrial use expansions come online over next 5 years  Continued toughening of EPA regulations of coal  Historic import/export reversal of US/Canada natural gas flows by 2014 (Marcellus gas exports to Canada)  Technology advancements for increased use of CNG as a transportation fuel Source: Union Gas, RBN Energy » Potential for LNG exports  Political/policy battle between domestic industrial users and producers  Sabine Pass, LA now permitted for exports; more terminals in application phase  Expect only moderate volumes of LNG exports to be approved – Avoids exposure of natural gas to similar market forces that have affected oil – Useful foreign policy instrument for Executive Branch » Expect any significant revival of dry gas fracking to re-ignite frac sand car market, transportation Source: Waterborne Energy Inc. Data in $US/MMBtu 23
  • 24. Shale Development NGL Impacts » Leading NGL and “wet gas” plays are Eagle Ford, Utica, Permian  Significant investment and expansion of gathering, fractionation, and takeaway capacity underway in the Utica Play  Takeaway capacity in Eagle Ford well exceeds current production (4x) » Requires fractionation facilities proximal to production  “Y-grade” must be separated into purified products  75% of fractionation capacity in US Gulf Coast  Mt. Belvieu, TX major trading & storage hub » Similar to dry gas, strong production due to fracking has HDPE Calculated Cost resulted in oversupply and depressed prices 2500 2000 $/Ton 1500 » However, also similar to dry gas, abundant supplies have sparked chemical industry renaissance 1000  Ethane is “cracked” to make ethylene, the most basic building block in the 500 chemicals supply chain 0  Over $15B in new announced ethylene expansions will come on-line over the next five years, increasing capacity by 33% (11 MMmt)  USA is now the low-cost producer of ethylene-based chemicals due to abundant supplies of ethane from shale plays (up to 60% raw materials cost advantage) Sources: CMAI, TopLine Analytics, and Alembic analysis, 2012 24
  • 25. Natural Gas & Petrochemical Downstream Products Feedstock/ Intermediary Low-Density Food packaging, film, Finished Polyethylene trash bags, diapers, toys Products House wares, crates, High Density drums, food containers, Polyethylene bottles. Siding, windows, Ethylene Vinyl Chloride PVC frames, pipe, medical Dichloride tubing Antifreeze Pantyhose, Natural Gas, Ethylene Ethylene carpets, clothing Fibers OIl Oxide Glycol PET Miscellaneous Bottles, film Ethane, Ethyl Polystyrene Styrene Naphtha, etc. Benzene SAN Insulation, cups SBR Linear Latex Instrument lenses, Detergents house wares Ethylene Alcohols Miscellaneous Vinyl Acetate Tire, hose Adhesives, coatings, textile/ paper. finishing, flooring Medical gloves, Miscellaneous carpeting, coatings
  • 26. Looking Ahead: NGLs » The (somewhat) hidden Condensate story  Used as diluent for heavy Canadian tar sands oil – critical for transportation as “Dilbit”  Trades at ~$110/bbl at Edmonton  Significant investment in infrastructure being made to deliver Eagle Ford, Utica condensate to Western Canada  Primary delivery via pipeline, but major rail volumes ex. Utica are required to get to Midwest pipeline injection points  Additional stressor on tight tank car supplies  Demand expected to grow from 200 MMb/d to 500 MMb/d by 2020 » Expect export market for NGLs to expand Source: Canadian Energy Research Institute  Pipeline reversals undertaken to meet demand, particularly ex. Utica to Sarnia, ON petrochemical complex and export storage and dock facilities in Philadelphia » Continued strong NGL production will drive chemical industry growth  Domestic end-use of materials, i.e. plastics, will expand significantly  Up to 40% of new petrochemical output will be for export  New demand for plastic resin hoppers, specialty and pressure tank cars Source: MarkWest, Rextag 26
  • 27. Shale Development Crude Oil Impacts » Dramatic increases in US production due to fracking  Projected to grow by ~30% over next four years  Strong play in Bakken; surging Permian and Eagle Ford development » Decreasing dependency on foreign crude Source: Morgan Stanley, February 2013 Source: Morgan Stanley, February 2013  Combination of US shale plus Canadian oil sands estimated to reduce imports to <15% by 2020  West African imports already down ~70% from 2010 levels » Rail critical to total crude market  Bakken as case study Source: BENTEK Energy 27
  • 28. Bakken Oil Production – History and Forecast 600000 ~704,000 BPD December 2012 500000 400000 Barrels Per Day 300000 First outbound unit train 200000 shipment December, 2009 100000 0 1952 1962 1972 1982 1992 2002 2012 Year Source: North Dakota Industrial Commission, North Dakota Department of Mineral Resources - Source: North Dakota Oil and Gas Division January 2013 January 2013 28
  • 29. Bakken Crude No Longer “Stranded” Due to Logistics ND Crude Production and Rail Transport » Change in past 15 months 800,000 700,000  November 2011: 600,000 – 2012 Bakken discount vs. WTI have ranged from 500,000 $8-12 bbl 400,000 – Undervalued due to logistics constraints 300,000 “stranding” the oil 200,000  January 2013: 100,000 – Bakken vs. WTI near even to ~$4 discount due to 0 improved logistics Dec. 2010 Dec. 2011 Jun-12 Aug-12 Oct-12 Dec-12 ND Production (bpd) Crude by Rail (bpd) Source: North Dakota Industrial Commission, PLG analysis » Significant expansion of crude by rail terminal capacities in 2011- 2012, but slowing in 2013  Increasing M&A activity, private equity interest in infrastructure 29 29
  • 30. Crude Oil by Rail – North Dakota Terminals (Existing by December 2012 and planned for 2013) Loading Capacity Rail Facility Location (Barrels per Day) Carrier Musket Corp Dore 60,000 BNSF Savage Services Trenton 90,000 BNSF Red River Supply Williston 10,000 BNSF Hess Oil Tioga 60,000 BNSF Plains All American Manitou 65,000 BNSF Bakken Transload (Plains) Ross 20,000 (65k Q2 2013) BNSF EOG Stanley 65,000 BNSF Basin Transload Zap 40,000 BNSF Bakken Oil Express Dickinson 100,000 BNSF Enserco Gascoyne 10,000 (60k Q2 2013) BNSF Inergy Partners Epping 120,000 BNSF Enbridge Berthold 10,000 (60k Q2 2013) BNSF Great Northern Fryburg 65,000 BNSF BNSF Total Capacity 715,000 Global Stampede 60,000 CP Dakota Plains New Town 40,000 CP Plains All American Van Hook 35,000 (65k Q2 2013) CP CP Rail Total Capacity 135,000 Total Crude by Rail Capacity 850,000 Source: PLG analysis 30
  • 31. North Dakota Class I Railroads and Crude Oil Terminals Map by PLG Consulting Source: RBN Energy 31 31
  • 32. Bakken Area Outbound Pipelines Current Capacity ( Q1 2013) - 440,000 bpd Announced pipeline capacity expansions Company Project BBL's/day Expected in Name Capacity service date Enbridge Berthold Expansion 145,000 1Q 2013 Sandpiper 225,000 2016 Plains All American Bakken North 75,000 1Q 2013 Saddle Butte High Prairie 160,000 1Q 2014 Oneok Partners Bakken Express 200,000 2015 Bakken Express ‘postponed’ November 30, 2012 due to lack of Trans Canada Bakken Marketlink 100,000 2015 subscription Keystone XL 830,000 2015? Total New Pipelines: 1,535,000 NEW pipeline capacity expected operational: 2013 220,000 2014 160,000 2015 325,000 TBD (K XL) 830,000 Bpd = Barrels per Day Source: PLG analysis, North Dakota Governors Pipeline Summit 2012, ND Pipeline Authority Jan 2013 32 32
  • 33. Bakken Production vs. Takeaway Capacity: 2012–2014 Projection Total Excess Year ND Production Pipeline Rail Terminal Rail Carrier ND Refinery Outbound & Logistics Forecast (Bpd) Capacity* Capacity Capacity Consumption Refinery Capacity Capacity 2012 700,000 460,000 670,000 1,200,000 60,000 1,190,000 490,000 2013 790,000 650,000 880,000 1,300,000 60,000 1,590,000 800,000 2014 860,000 900,000 880,000 1,350,000 60,000 1,840,000 980,000 * Excludes Keystone XL Bpd = Barrels per Day Source: PLG Analysis 33
  • 34. Crude Oil Pipelines – Existing and Future Source – CAPP Report 2011 34
  • 35. Crude Oil by Rail vs. Pipeline » Current pipeline options ~ 30-45% lower cost vs. rail » Near-term offsetting rail advantages:  Site permitting, construction is much quicker and easier  Much lower capital cost and scalable  Shorter contracts  Transit to destination - 5-7 days via unit train vs. 30+ days via pipeline (between Bakken and US Gulf Coast)  Origin and destination flexibility/opportunistic to new $16.00 $14.70 $14.00 markets $11.50 Dollars Per Barrel $12.00 $10.50 » Long-term challenges that will affect rail $10.00 volumes and margins: $8.00 $6.50 $6.00  Pipeline expansions $4.00 $2.00  Bakken-WTI price equilibrium $-  Any significant narrowing of price differential between Pipeline to Rail to Cushing Pipeline to Pt Rail to Pt Cushing Arthur Arthur Brent and WTI Source: PLG analysis 35
  • 36. Crude Oil by Rail Volume Growth 50,000 45,000 40,000 35,000 Carloads 30,000 BNSF UP 25,000 CPRS 20,000 CN CSXT 15,000 KCS NS 10,000 5,000 0 2008 2009 2010 2011 2012 Quarterly Data Source - US Rail Desktop 36
  • 37. Shale Development Impact on Crude Oil Market Dynamics Destination » Crude oil will find its way to market one way or Markets another  Price differentials Capita Key Price – Bakken and WTI trading at ~$20/bbl less than Brent l Drivers – Alberta Bitumen trading at ~$40/bbl less than Brent  E&P, midstream players willing to rapidly deploy significant capital to enable access Logistics – Multi-modal logistics hubs in shale plays – New multi-modal terminals/trading hubs at destination markets (i.e. Cushing, OK, St. James, LA, Pt. Arthur, TX, Albany, NY, Bakersfield, CA) – Lease and purchase of railcar fleets – Pipeline expansions, reversals, new construction  Refineries installing unit train receiving capability – Particularly coastal refineries previously captive to waterborne imports (i.e. Philadelphia, PA, St. John, NB, Anacortes, WA, Ferndale, WA) » However, not all crudes are created equal  Light/sweet vs. heavy/sour – Brent, WTI, and US shale play crudes (Bakken, Permian, Niobrara, Permian) are light/sweet – Heavy/sour crudes include Western Canada, Venezuela, Mexico, Alaska North Slope (ANS), Middle East (light/sour) – Light/sweet requires less downstream processing – Heavy/sour has higher sulfur content 37 37 – Bakken has higher gas, jet, and distillate yield than peer crudes
  • 38. Shale Development Impact on Crude Oil Market Dynamics (continued) » Refineries are generally configured to run certain types of crude  Significant investments made ($48B since 2005) at select refineries to install coker units that will allow processing of heavy/sour  Major heavy/sour refining clusters: Corpus Christi, Houston, Chicago, southern Illinois, Ohio, West Coast » The special case of the Canada Oil Sands  Heavy/sour crude has a natural home in Midwest and US Gulf Coast  Pipeline capacity to US Midwest refining centers is at capacity  As Canada waited for pipelines, Bakken built rail infrastructure to provide 50+% of takeaway capacity  Pipeline developments to coasts, US markets still 2+ years away, while tank car supply constrains rail options  Alberta producers’ opportunity cost at $60MM/day due to Bitumen discounting  Province of Alberta receives 25% of its $40B annual budget from oil royalties Source: PLG Consulting 38 38
  • 39. Shale Development Impact on Crude Oil Market Dynamics (continued) » The gusher of new US light/sweet shale oil production made possible by fracking has upended the traditional oil logistics and trading patterns  Result: “Wrong place/wrong oil” supply displacements, i.e. Cushing overflow  Rapid investment in new logistics infrastructure, routes, modes, and terminals  The biggest current bottleneck: Railcars – Current order backlog runs to 3Q 2014 – Major purchases by oil majors and midstream companies – Extremely tight market with very high lease rates » A “new normal” in crude oil flows will emerge in conjunction with continued North American oil production over the next five years 39 39
  • 40. Looking Ahead: Crude Oil Production Growth and Anticipated Product Flows = Light/Sweet = Heavy/Sour Oil Sands 1,615 +2,300 Bakken 704 +855 Permian 514 +607 = Storage terminal(s) = Pipeline = Refinery cluster – Sweet/Intermediate Eagle Ford = Marine = Refinery cluster – 352 Sour/Intermediate +1,087 = Rail 123 = Current b/d (000) 40 +420 = Future b/d (000) additional by 2017 Source: BENTEK Energy, CAPP, Railroad Commission of Texas, PLG Consulting
  • 41. The Shale Development Revolution – Big Picture for the Railcar Industry Crude Cars New Energy Paradigms Capital Downstream Price Look Beyond Today Opportunities Expect Change Small Cube Hoppers Logistics Rapid Change 41
  • 42. Professional Logistics Group Thank You! For follow up questions and information, please contact: Taylor Robinson, President +1-508-982-1319 / trobinson@prologisticsgroup.com Graham Brisben, CEO +1-708-386-0700 / gbrisben@prologisticsgroup.com Jean Arndt, Vice President +1-630-505-0273 / jarndt@prologisticsgroup.com Jeff Dowdell, Senior Consultant +1-732-995-6696 / jdowdell@prologisticsgroup.com Gordon Heisler, Senior Consultant +1-215-620-4247 / gheisler@prologisticsgroup.com Jeff Rasmussen, Senior Consultant +1-317-379-5715 / jrasmussen@prologisticsgroup.com Eric Lamy, Business Manager +1-508-633-3993 / elamy@prologisticsgroup.com Jay Olberding, Analyst +1-636-399-5628 / jolberding@prologisticsgroup.com This presentation is available at: WWW.PROLOGISTICSGROUP.COM 42