Shale Development: The Evolving Transportation Impacts
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1. Logistics Engineering SupplyChain Shale Development: The
Evolving Transportation Impacts Prepared for: March 3, 2014 Rail
Equipment Finance Conference 2013
2. 2 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
3. 3 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
4. 4 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
5. 5 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 0 500 1,000 1,500 2,000 2,500 0 50,000 100,000 150,000 200,000
250,000 2007 Avg. 2008 Avg. 2009 2010 2011 2012 2013
OperatingOnshoreRigs Carloads Operating On Shore Rigs All Sand
Carloads Petroleum Carloads * Q4 2014 UP carloads estimated *
*
6. 6 U.S. Frac Sand IndustryTrends Shale Development: The
Evolving Transportation Impacts Sand 33% Rail - Freight, FSC and
Eqp Lease 42% Destination Transload & Trucking 25% Total
Delivered Cost perTon ~ $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- out sand transload facilities Benchmark
high-efficiency unit train example Illinois to South Texas
Single-line haul (one rail carrier), private railcars achieving two
round trips per month, origin sand facility has direct rail
load-out and destination trucking is less than 100 miles
7. 7 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 byVolume
Freedonia Group Analysis 8/13
8. 8 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
forThermal Generation Shale Development: The Evolving
Transportation Impacts Source: EIA, February 2014
9. 9 Shale Related RailTraffic Still Small Relative to
CoalVolumes Shale Development: The Evolving Transportation Impacts
0 500,000 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 * * *
11. 11 Natural gas has recently been ~5X cheaper than oil on a
BTU-basis Innovation will convert more transportation fuels and
other 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 CompetitivenessThan 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
12. 12 US Ethane has significant structural cost advantage vs.
Europe and Asia Europe andAsia 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
NGLsWill Give US LongTerm 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
13. 13 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
14. 14 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 of 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
of 2020 production (75B cf/d) US Shale Gas Background and Future
Shale Development: The Evolving Transportation Impacts Source: RBN
Energy
15. 15Shale Development: The Evolving Transportation Impacts
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 ImpactTo US Industrial
Renaissance
16. 16 The Importance of Price Differentials to Crude by Rail
Shale Development: The Evolving Transportation Impacts
Differentials made rail attractive Bakken andWTI 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 byApril 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
18. 18 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
19. 19 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 PADDV 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
21. 21 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 primarilyWilliston 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 Willistons 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
22. 22 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
23. 23 Bakken Crude HigherVolatility Shale Development: The
Evolving Transportation Impacts Click image to watch video
24. 24 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 toCBR) 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