Shale Energy Transportation Logistics Impact

8/17/2019 Shale Energy Transportation Logistics Impact

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At a glance

Each segment of the

transportation and logistics

industries – railroads,

trucking, shipping, and

airlines – is experiencing

the dramatic impact of the

shale energy revolution

Shale energy: A potential game-changerImplications for the UStransportation & logistics industry


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In 2000, shale gas providedonly 1% of US natural gas

production; by 2011, it wasover 34%.

In 2000, shale gas providedonly 1% of US natural gas

production; by 2011, it wasover 34%.

Since 2010, the US hasemerged as the largest gas

producer in the world.

The U.S. Energy Information

Administration (EIA) forecaststhat by 2040, 50% of the UnitedStates’ natural gas supply willcome from shale gas.

The shale industry supported 1.7 million jobsin 2012 and contributed$62 billion in state and

federal tax revenue.


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3Shale energy: A potential game-changer Implications for US transportation & logistics industry

1 http://online.wsj.com/article/SB10001424127887324263404578614122954685146.html

2 http://fossil.energy.gov/programs/gasregulation/reports/summary_lng_applications.pdf

Introduction

The shale energy revolution is gaining speed in the United

States, transforming the way we do business. A recent articlein The Wall Street Journal called it “one of the biggest forces tohit the US economy in modern history.”1

Transportation and logistics companies are experiencing theimmediate and dramatic impact of this revolution. They areessential to the movement of people and equipment to theshale elds and the transportation of shale oil and gas from theelds to processing plants. Longer-term, there will be addi-tional opportunities for transportation and logistics companiesas the major energy players in the United States look to exportliqueed natural gas (LNG) derived from shale. There arecurrently about 20 applications before the US Department ofEnergy from companies wanting authorization to export LNG.2

Shale energy is also having a major effect on the chemicals andmanufacturing industries in this country, with clear ramica-tions for transportation and logistics companies. This newsource of abundant, low-cost energy is proving to be a signi-cant incentive for chemical producers and manufacturers toshorten their supply chain and bring production facilities backto the United States. A revived manufacturing sector wouldincrease the need for rail and trucking to move more products

domestically and for shipping exports abroad.

Following is a look at the implications of shale energy fordifferent segments of the transportation & logistics industry.


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4 PwC

The shale oil boom is creating signi-

cant opportunities for the railroads as ameans to transport people, equipment,

and oil. Railroads are being used to

haul the special sand, known as “frac

sand,” pipes, acids, and other chemi-

cals needed in the shale extraction

process. After extraction, rail is being

used to carry away waste products

and shale oil and gas. Rail carloads

of crude oil tripled last year to more

than 200,000.3

The inbound and outbound use ofrail has led to a surge in demand for

cars that can carry crude oil. At new

production sites, which do not have

existing pipelines, rail cars are being

used to transport oil and gas from the

elds to the reneries. Pipelines are

costly and time-consuming to build

and often subject to construction

delays because of the need to obtain

various permits. Rail car companies

are reaping the benets, experiencing

a backlog of orders for petroleum-

carrying cars, and reporting strong

nancial results.4

Railroads: expanded opportunities

In some shale-producing regions, the

railroads have had to build additionalinfrastructure to keep up with demand.

The Bakken shale eld in North Dakota

is a good example. By the end of 2010,

daily production had grown to the

point that it exceeded the capacity

of available transportation options,

requiring increases in rail infrastruc-

ture.5 This April, Bakken oil output

hit a record 727,149 barrels a day, and

about 75% of the oil was carried out

by trains.6 Rail has become the favored

mode of transport in the area becauseit is cheaper than trucking and more

exible than pipeline.

With the movement from coal to shale

as an energy source, the rail industry

will increasingly move shale-related

products. Based on the US Energy

Information Administration’s estimates

of shale oil, shale gas, and coal produc-

tion, and conservative assumptions

about rail’s market share of shale oil

transportation, the increase in shale-

related carloads should more than

offset the decline in carloads of coal by

2020 (see chart).

Rail car companiesare reaping thebenets, experiencinga backlog of orders for petroleum-carrying cars... 4

3 http://www.bloomberg.com/news/2013-01-03/buffett-like-icahn-reaping-tank-car-boom-from-shale-oil.html

4 http://www.bloomberg.com/news/2013-01-03/buffett-like-icahn-reaping-tank-car-boom-from-shale-oil.html

5 http://www.progressiverailroading.com/rail_industry_trends/article/

Railroads-aim-to-tap-Bakken-Shales-vast-traffic-potential--26587

6 http://www.bloomberg.com/news/2013-06-14/north-dakota-s-bakken-hits-record-oil-production-level-in-april.html


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0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Historical Projected

2010

(6,831 total

carloads)

2011

(6,963 total

carloads)

2020

(7,001 total

carloads)

Forecasted net impact of shale and coal production on

Class I carloads

Source: EIA, PwC Analysis

Note: Numbers only include shale oil carloads from wells and frac sand carloads to

shale oil and gas wells and not carloads of pipe for wells and new pipelines. Also,

the numbers assume that rail’s share of transporting shale oil as compared with

pipelines stays close to historical (and low) norms.

6,686 6,737

145 226

6,595

406

Shale oil and frac sandCoal

Railroads are also getting a boost from

the positive effects of shale on the USchemical industry, which has been

transformed into a low-cost producer

of petrochemicals. Rail is essential

to the movement of chemicals in the

United States; nearly a quarter of US

shipments of chemicals are transported

by rail.8 A recent American Chemistry

Council study found that, as of March

2013, more affordable domestic energy

has contributed to the announcement

of 97 new chemical industry projects in

the United States with an approximate value of $72 billion.9 As production

at these new plants comes online,

rail carloads of chemical products areexpected to increase as well.

In addition to the increased demand

for rail transport, the natural gas

derived from shale deposits has the

potential to provide a cheaper source

of fuel. BNSF Railway, one of the

biggest US consumers of diesel fuel,

plans to test the use of natural gas to

power its locomotives this year.10 If

successful, this could result in a signi-

cant cost reduction for rail companies.

The powering oflocomotives withnatural gas could potentially resultin a signicant costreduction for railcompanies.7

7 http://www.championgroup.com/news/worlds-largest-producer-of-natural-gas-now-its-u.s

8 http://www.americanchemistry.com/Policy/Rail-Transportation

9 http://chemistrytoenergy.com/shale-study

10 http://www.bnsf.com/employees/communications/bnsf-news/2013/march/2013-03-06-a.html

Forecasted net impact of shale and coal production on Class I carloads


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6 PwC

The low price of liqueed natural

gas (LNG) prices relative to the more

expensive diesel fuel has led many

companies to switch to vehicles run on

natural gas. UPS is a case in point with

its large eet of more than 2,700 vehi-

cles that use alternative fuel, including

liqueed natural gas and compressednatural gas engines.11 FedEx also

uses a large number of alternative-

fuel vehicles in Asia, Europe, and

Latin America.12

However, in order for trucking compa-

nies to expand their use of more

affordable fuels, there needs to be

infrastructure support. Clean Energy,

the largest provider of natural gas for

Trucking: lower-cost fuel

transportation, is building a network of

LNG truck fueling stations on interstate

highways. As part of the rst phase

of this initiative, known as America’s

Natural Gas Highway® (ANGH),

approximately 150 stations are sched-

uled to be in operation by the end of

2013.13

In addition to changing fuel dynamics,

trucking activity has increased as a

result of shale production. Trucks are

used to haul fresh water, frac sand,

waste products, and heavy equip-

ment. Longer-term, trucks will benet

from the shale-related manufacturing

renaissance in the United States.

In addition tochanging fueldynamics, truckingactivity has increased

as a result of shale production.

11 http://www.ups.com/content/us/en/bussol/browse/leadership-afvfleet.html

12 http://about.van.fedex.com/article/cleaner-vehicles

13 www.cleanenergyfuels.com/buildingamerica.html


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If pendingapplications areapproved, US exportscould result inapproximately 3,600new LNG tankerdepartures per year.14

Shipping: poised to grow

The North American shipping industry

may become a major exporter ofnatural gas, thanks to the aggressive

drilling of shale. There are more than

20 proposed LNG export terminals

in the United States seeking permits

to allow total processing of about 30

billion cubic feet a day, according

to the United States Department of

Energy. If currently pending applica-

tions are approved, US exports could

result in approximately 3,600 new LNG

tanker departures per year.

The shipping industry could benet

from the shale boom in other ways as

well. Recently, it was announced that

gas drillers in West Virginia had made

inquiries regarding the shipment of

shale waste by barge,15 since it is less

costly than using trucks for transport.

(At this time, however, no shipments

are being allowed until the US Coast

Guard determines how to ensureenvironmental safety.) Also, shipping

is expected to play an increasing role

in the transportation of machinery and

other products needed for exploration

and production.

Furthermore, shipping will play an

increasingly important role in the

export of chemicals and manufactured

goods. The United States is becoming

a major global player in petrochemical

production, with half of new invest-ment coming from rms outside

the United States, and producing

many chemicals and plastics for the

export market.16 Longer-term, the

chemical advantage will also result in

more manufactured goods available

for export.

14 http://www.eia.gov/todayinenergy/detail.cfm?id=811

15 http://www.statejournal.com/story/20505904/ shipment-of-shale-gas-waste-liquids-awaits-coast-guard-go-ahead16 http://www.americanchemistry.com/Media/PressReleasesTranscripts/RelatedPDF/ACC-Report-Reveals-

Economic-Benefits-of-Announced-Chemical-Industry-Investments.pdf


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8 PwC

The high price of jet fuel, the singlelargest cost component for airlines,

coupled with the volatility of crude oil

prices, is spurring a search for cheaper

alternatives, such as those based on

natural gas. Qatar Petroleum and Shell

(RDSA) have completed an $18 billion

gas-to-liquid (GTL) plant that produces

jet fuel from natural gas.18 Shell is now

exploring a similar facility on the US

Gulf Coast.19 In addition, Sasol, a South

Africa energy company, announced

in late 2012 that it would build a new

GTL plant in Louisiana that will be the

second largest GTL plant in the world,

second only to the plant in Qatar.20

In 2009, Qatar Airways conducted the

rst commercial ight to be powered

by fuel derived from natural gas.21

The following year, United Airlines

conducted the rst US commercial

ight using a synthetic jet fuel blend

derived from natural gas.22 In 2012,

Boeing submitted a design proposal to

NASA for a plane designed to run on

liqueed natural gas.23

Airlines: short- and long-term opportunities

The use of natural gas for jet fuel is still years away from widespread commer-

cial use. Much depends on its pricing

in relation to the price of crude oil

as well as other possible alternative

fuels. Certainly, the impetus is there

for additional development, given

today’s environment concerns around

CO2 emissions.

In the nearer-term, airports and

airlines are beneting from the

increased trafc to and from the

major shale gas regions. For example,

ights originating in North Dakota

airports serving the Bakken shale eld

have experienced an increase in load

factors of almost 10% over the last

ve years as trafc has nearly doubled

(see chart).

Airports and airlinesare beneting fromthe increased trafcto and from themajor shale gasregions.17

17 http://www.iea.org/publications/freepublications/publication/English.pdf

18 http://oilprice.com/Energy/Natural-Gas/Qatars-Giant-Gas-To-Liquids-Plant-To-Yield-Profits-Of-6-Billion-A-Year.html

19 http:/www.shell.com/global/future-energy/natural-gas/gtl.html

20 http://www.nytimes.com/2012/12/04/business/energy-environment/sasol-plans-first-gas-to-liquids-plant-in-us.html?_r=0

21 http://www.reuters.com/article/2009/10/13/us-britain-gas-flight-idUSTRE59C1NJ20091013

22 http://www.greenaironline.com/news.php?viewStory=810

23 http://www.wired.com/autopia/2012/03/boeing-freezes-design-with-liquid-natural-gas-powerd-airliner/


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Domestic load factors higher at North Dakota airports

Domestic load factors higher at North Dakota airports

ND

64%

66%

68%

70%

72%

74%

76%

78%

80%

82%

84%

86%

20122011201020092008

Source: US Bureau of Transportation Statistics, PwC Analysis

All


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10 PwC

This is an exciting time for US trans-

portation & logistics companies. As production of shale gas and oil

continues to grow, so, too, do the

opportunities. In addition to serving

shale energy production during the

drilling and completion stages of new

wells, transport is needed to move gas,

oil, and waste by-products.

Railcars, planes, and trucks are all

serving the major shale regions in

North Dakota, Ohio, and Pennsylvania.

But there are signicant shale deposits

in other areas of North America that

present additional opportunities. The

Marcellus Shale, most actively being

drilled today in Pennsylvania, spans

West Virginia, New York, Ohio, and

Maryland and is considered to have

a great deal of unrealized potential.24

It may be the second largest natural

gas eld in the world.25 Under the

Marcellus Shale is the Utica Shale,

which is thicker and even more exten-sive than the Marcellus, and covers

much of the Appalachian Basin.

The number of active oil and natural

gas rigs in the Utica Shale forma-tion doubled from 2011 to 2012,26

and seven processing plants and four

delivery pipelines valued at more than

$7 billion are under construction.27

Additional major shale plays are the

Barnett Shale in North Texas and the

Haynesville Shale in Louisiana and

Texas. The latest examples of poten-

tially abundant deposits are the Antrim

Shale that covers most of Michigan and

the Eagle Ford Shale in South Texas.28

Taking advantage of opportunities

24 http://www.iea.org/publications/freepublications/publication/English.pdf

25 anga.us/why-natural-gas/abundant/shale-plays#.UeL1PHTs

26 http://www.eia.gov/todayinenergy/detail.cfm?id=885027 www.ohio.com/blogs/drilling/ohio-utica-shale

28 anga.us/why-natural-gas/abundant/shale-plays#.UeL1PHTs


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The shale plays in Canada are for

the most part in an earlier stage ofdevelopment than in the United

States. There are large, rich deposits

in Alberta and British Columbia, with

the most intense focus to date on the

Duvernay formation in Alberta.29

While pipelines may eventually move

the bulk of shale oil and gas, it will

take time to develop the infrastruc-

ture; and rail, trucks, and planes will

still be needed to transport people

and equipment. In the not-too-distant

future, ships will carry LNG to other

parts of the world. And, as shale

energy helps to revive the US manu-

facturing industry, it will help most

transportation modes, as they will be

needed to move products domestically

and abroad.

Transportation and logistics execu-

tives should consider the opportu-nities currently presented by the

rapid growth of shale energy. The

“winners” will develop strategic

plans that consider the impact of

shale on the overall economy and the

potential it presents for the growth

of their businesses now and for the

foreseeable future.

29 www.ogfj.com/articles/print/volume -10/issue-7/features/canadian-shale-update.html


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about how this subject

may affect your business,

please contact:

US Transportation & Logistics

Industr y Leader

Jonathan Kletzel

+1.312.298.6869

[email protected]


Assurance Leader

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[email protected]


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Shale Energy Transportation Logistics Impact