Logistics Challenges and Solutions

Oilfield Minerals

Managing Channels and Costs

• Overview

• Rail

• Truck

• Barge

• Ports

• Import Bulk

• Ocean Containers

• Oilfield Mineral Logistics Overview

• USA Deregulation: no longer government-approved tariffs

• Barge -1976 (DOJ/ICC)

• Airlines - 1978 (ADA)

• Trucking - 1980 (MCA)

• Rail - 1980 (Staggers)

• Ocean - 1998 (OSRA)

• Today

• Global sourcing and multimodal options

• Strategic and Tactical Logistics Management

• Analyze, ask questions, think “outside the box”

• Develop landed cost / transit time matrices

• Lowest cost may not be shortest transit

• React / respond to negative variances

• Shipper with most cost-efficient logistics will survive

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

'81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09

Pipeline excludes natural gas. Source: Bureau of Transportation Statistics

Railroads Are the Leader in Freight Transportation

Railroads

Trucks

Water

Pipeline

(% of ton-miles)

ASSOCIATION OF AMERICAN RAILROADS SLIDE 3

ASSOCIATION OF AMERICAN

RAILROADS SLIDE 4

Characteristics of North America Freight Railroads

• Vast majority privately-owned

• Same company usually owns the track and operates

trains over it

• No automatic access to another’s tracks

• Little government funding

• Regulation (USA):

• Federal Railroad Administration (FRA) for safety

• Surface Transportation Board (STB) for rates, service

Source: American Association of Railroads

North American “Class I” Rail Roads

BNSFCNCPCSXFXEKCS/KCSMNSUPOther RRs

Source: AAR

From 56 railroads in 1975 to 8 Today

Short Line Rail Roads in the U.S.

Source: AAR

Canadian Railroads

Rail Road Freight Rates

• Common carrier providing service to the general public without discrimination for "public convenience and necessity“

• Specific contracts replaced by public tariffs

• Rail roads adopted “market pricing” in some situations

– Specific origin (area) to specific destination on same railroad

– Specific commodity (STCC)

– Specific rail car type (e.g., O-T, CVH, BOX, private, system)

– Base freight rate is same for all shippers

– Subject to annual rate review and adjustment

• Fuel Surcharge disappearing as annual rate adjustments are implemented

Rail Freight Rates

• Freight rate may be influenced

– Annual volume, detailed forecast

– “Unit” trains vs. “manifest” shipments

– Shipping in “blocks”

– New business to rail road

– Truck competition

– Rail competition

– Barge competition

• “Interline” base rate is result of negotiation between origin

rail road and destination rail road(s)

Rail Freight Rates Outlook

• 1980 – 2001 railroads aggressively cut prices on competing

business until covering less than 50% of fixed cost

• Railroads stopped competing: 2003 – 2015 average annual rate

increase 5.6%

• STB determines revenue adequacy and rate reasonableness

– Industry cost of capital compared to carrier’s ROI determines if

railroad “revenue adequate”

– STB tolerates a “reasonable” level above revenue-adequate

• Short-term expectations

– Railroads recovered from price-cutting era

– Expect 3-4% annual upward “adjustments”

– Railroads want to avoid STB intervention

Variable Rail Shipper Cost Components

• Base freight rate

• Private vs. rail road “system” rail cars

• Specific rail car weight limits

• Fuel surcharge

• Load design, dunnage, weight

• Service issues and delays

• Shipment tracking

• Delivery transload costs

• Demurrage

• Cargo damage

USA Rail Deregulation – Success for Shippers and Railroads

• HOS Rules having impact on productivity

• Resurgence of oversight and regulatory measures

• Driver shortage and rapid driver turnover

• Fragmented industry but showing signs of consolidation

Trucking Trends

• Oilfield trucking rates

depressed but slightly

higher than general trend

• Mileage vs. flat vs. hourly

vs. day rates

• Over 25% of shippers

have set their own FSC

index

Inland Waterway System - Barge

• From 31% share U.S. freight

movement 1980 to 16.5% 2001

• Railroads captured much volume

by aggressive rates

• One company as good as another

keeps rates low, barely above

marginal cost

• Limitations: north of St. Louis

(winter) and high / low water events

• Short term: spot rates maintain

depressed level from 2015

• Typical contracts 3 years with 2-4%

annual adjustment

Source: Union Pacific Railroad

U.S. Gulf, West Coast Ports for Bulk and Breakbulk

Import Mineral Ore FOB Loaded on Vessel

• Mineral / Vessel ~ 8 components

• Port of Entry Stevedoring / Port ~ 6 components

• Rail to Destination ~ 6 components

• Destination ~ 3 components

Dry Bulk West Coast Cost Components

Dry Bulk Mid River Discharge Cost Components

• Mineral

• Freight

• QC program

• Demurrage / FSC / Contingency

• Ocean Insurance

• Freight Broker Commission

• Draft Survey – Vessel

• Customs Duty

• Harbor Maintenance Fee

• Customs Broker Fee

• Quality Survey

• Miscellaneous Banking

• Vessel Offload & Handling

• Barge Draft Survey

• Barge transit

• Offload & Handling at Destination

SOLAS Container Weight Verification Requirement

• Effective July 1, 2016

• Container must be weighed before loading to ship

• Two permissible methods

• After packed

• Weigh cargo/contents and add tare weight

• Estimating not permitted, shipper has responsibility to weigh

• Weight verification must be signed by the shipper

• Lack of signed shipper weight verification can be weighed

by marine terminal at port

• When no shipper verification, terminal and carriers need to

agree on process at terminal for obtaining container weight

• Packed container weighed at load port, that weight to be

used for vessel stow planning

• Vessel stow plan to use verified weights for all containers

RDC Logistics

Richard Dodd, President

14080 Palm Drive, Suite D-135

Desert Hot Springs, CA 92240-6851

Tel: 760-309-2487

Cell / Mobile: 281-460-5077

Fax: 760-309-8591

rdclogistics@gmail.com