Plg broe presentation final v gb 062314

Logistics Engineering Supply Chain

Shale Development: The Evolving

Transportation Impacts

Prepared for:

June 23, 2014

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Boutique consulting firm with team members throughout North America

§  Established in 2001 §  Over 100 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/hedge funds/institutional investors

About PLG Consulting Partial Client List

Shale Development: The Evolving Transportation Impacts

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Hot Topics

v  Unconventional production continues to grow! v  Production and forecasts

v  Evolving technology

v  Big picture impacts: Energy v  “Energy Independence”

v  Gas vs. Coal

v  Big picture impacts: Manufacturing v  Natural gas feedstock

v  Long-‐term raw materials advantage

v  Changing energy flows in North America v  Keystone XL and other pipelines

v  Crude by Rail – growth, sustainability, safety

v  Energy exports? v  LNG

v  Crude oil


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Unconventional Production Continues to Grow! Production and forecasts

§  Convergence of hydraulic fracturing and horizontal drilling in last five years has led to rapid growth in U.S. shale crude, natural gas, NGL production

§  Improved Oil Sands extraction processes have led to rapid growth in Canadian production

Source: www.epmag.com

SAGD Horizontal Drilling

Source: Marathon, February 2014


Source: RBN Energy, June 2014

Evolving technology §  Horizontal drilling in shale plays

u  More well bores per well pad

u  Optimal lateral lengths

u  Zone fracturing

u  Shorter, fatter fractures

u  Productivity gains continue!

§  Steam Assisted Gravity Drainage (SAGD) in Oil Sands

u  Two parallel wells are drilled

u  Upper well has high pressure steam injected

u  Lower well recovers softened bitumen

u  Improvements in this technology has made bitumen extraction profitable

Source: CAPP Report, June 2014

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Big Picture Impacts: “Energy Independence”

U.S. liquid fuel demand projected to slightly decrease

§  Continued decrease in gasoline demand

§  U.S. projected to still be significant importer

Waterborne imports being displaced as shale oil and oil sands production comes online

§  North America to get close to “Energy Independent” as U.S. shale crude pushes out light crude imports and Oil Sands crude pushes out heavy imports

Infrastructure built rapidly to help facilitate new energy movements

Source: EIA Annual Energy Outlook Early Release, December 2013

U.S. Petroleum and Other Liquid Fuels Supply & Consumption

Source: Enbridge Investor Presentation, June 2014


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Big Picture Impacts: Natural Gas vs. Coal

Source: Devon Energy Investor Presentation, June 2014

U.S. Natural Gas Cumulative Coal Retirement Demand Forecast

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

§  EPA proposed mandate that power plants cut CO2 emissions by 30% by 2030 from 2005 levels

§  Scheduled coal unit retirements; 55GW through 2020


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Shale Supply Chain and Downstream Impacts

Feedstock (Ethane)

Byproduct (Condensate)

Home Heating (Propane)

Other Fuels

Gasoline

Diesel

Gas

NGLs

Crude

Proppants

OCTG

Chemicals

Water

Cement

Generation

Process Feedstocks

All Manufacturing

Steel

Fertilizer (Ammonia)

Methanol

Chemicals

Petro-‐chemicals

Other Petroleum Products

Inputs Wellhead Direct Output Thermal Fuels Raw Materials

Downstream Products

Jet Fuel


Impa

ct yea

rs 2010

2011 2012

2013 2016

2018

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Manufacturing: Natural Gas Feedstock

Source: RBN Energy, January 2014

0

10

20

30

40

50

60

70

80

0

500

1,000

1,500

2,000

2,500 U.S. Rig Count with Natural Gas Production

Gas Oil U.S. Natural Gas Production

rigs Bcf/d

Source: Baker Hughes, EIA, PLG Analysis, June 2014

Gas production has increased over past five years with a significantly lower gas rig count

§  Drilling productivity continues to increase production per well and lower costs

Abundant US gas recoverable reserves US gas cost competitiveness is sustainable

§  Supply will overwhelm demand as prices approach $5

§  US government and capital constraints will likely limit LNG export to protect US from world gas market price

Shale gas boom makes direct-‐reduced iron steel economical

§  Gas strips oxygen from iron ore to make high purity/quality pellets – lower cost vs. scrap steel

U.S. methanol production – 10 projects announced

Natural gas is a feedstock for ammonia production §  ~70% of cash costs (CF Industries)

§  12MM mt new domestic manufacturing capacity announced

§  However, headwinds include EPC, labor, capital constraints


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Manufacturing: Long-‐Term Raw Materials Advantage

Source: LyondellBasell, June 2014

US has a large structural cost advantage due to gas-‐based ethane for downstream products

§  Europe and Asia are tied to crude-‐based naphtha as a feedstock for their downstream processing

Currently US ethylene cracker capacity is tight §  Ethylene prices are inflated in short term but additional capacity expected

in 2016/2017 which will moderate prices Materials typically account for 60-‐70% of manufacturing cost of goods sold (COGS)

§  Total labor cost is ~20% of COGS for NA manufacturers

§  Transportation & logistics costs are in “Other” 15%

§  Energy cost is usually less than 5% for final manufacturer but energy costs also buried in raw material costs and transportation


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Changing Energy Flows in North America: Pipelines Western Canada crude oil pipelines

§  All proposed Oil Sands pipelines are under intense scrutiny and subject to court challenges

§  Pipeline capacity will not match anticipated production because of pipeline delays and producers have adopted crude by rail as a risk mitigation

§  Pipelines likely built in medium term (~ 2018 operational)

u  Trans Mountain Express

u  Alberta Clipper

u  Keystone XL

§  Pipelines likely delayed long term (2019 and beyond)

u  Northern Gateway

u  Energy East

US crude oil pipelines §  Large pipeline build to Texas Gulf Coast from Permian

§  Pipeline capacity out of Bakken continuing to increase

§  Pipeline build-‐out from Guernsey, WY in progress

New patterns in natural gas supply and demand §  Repurposing and retirement of some existing pipelines

§  New pipelines being built to transport gas out of Marcellus

§  Existing gas pipelines are being made bi-‐directional to allow flow towards Gulf Coast (not away), particularly for LNG export

Source: Enbridge, April 2014

Natural Gas Movements Source: CAPP, June 2014


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Changing Energy Flows in North America: Crude by Rail

Three phases of crude by rail phenomenon in North America §  2009-‐2011

u  CBR developed from the Bakken to bridge the gap until pipelines are built

u  First unit train shipment in Dec. 2009

u  Destination market: Cushing, OK WTI trading hub

§  2011-‐2013 u  Ascendancy of trading as main growth driver in CBR

u  WTI-‐Brent-‐LLS differentials become all important

u  St. James, LA LLS hub becomes most attractive destination

u  Coastal refineries begin rail receipt infrastructure build-‐out

u  Tank car market overheats, becomes main growth constraint

§  2013-‐current u  CBR from Bakken assumes long-‐term structural role in crude oil

market

u  Bakken CBR transitioning to east and west coast markets; LLS and WTI converge as Permian and Eagle Ford growth floods USGC

u  Canadian CBR build-‐out begins; tank car market reorienting to coiled/insulated car types (~2/3 of CBR fleet order backlog)

0

200

400

600

800

1,000

1,200 Mbbl/d ND Crude Production and Rail Transport

ND Production Crude by Rail Source: North Dakota Pipeline Authority, PLG Analysis, May 2014


Source: PLG CBR Forecast (www.CBRforecast.com), May 2014

Bakken & Oil Sands Base Case Takeaway (kbpd)

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Crude by Rail Regulations and Safety Rail industry has a strong safety record, but optics of CBR accidents are overwhelming any positive statistics

Industry, media, government focus on tank car design §  Canada announced three year phase-‐out of non-‐CPC-‐1232 cars in April 2014

§  New USDOT and PHMSA regulations expected early 2015

Railroad operating practices, maintenance equally important §  Railroad operating rule changes on hazmat train handling

§  Increased scrutiny, insurance requirements

§  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

Multiple risk assessment initiatives underway


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Initially a political/policy battle between domestic industrial users and producers

FERC approved LNG export terminals §  Cheniere Energy’s Sabine Pass LNG in Sabine, LA (under construction)

§  Sempra Energy’s Cameron LNG in Hackberry, LA (approved 6/19/2014)

Proposed US LNG Export Terminals to FERC (in Bcfd):

There are 13 other US potential export terminals along with 3 Canadian proposed sites and 10 other Canadian potential sites

LNG Export Opportunity

Location Bcfd Location Bcfd

Freeport, TX 1.8 Elba Island, GA 0.35

Corpus Christi, TX 2.1 Sabine Pass, LA 1.40

Coos Bay, OR 0.9 Lake Charles, LA 1.07

Lake Charles, LA 2.2 Plaquemines Parish, LA 1.07

Cove Point, MD 0.82 Sabine Pass, TX 2.1

Astoria, OR 1.25 Pascagoula, MS 1.5

Lavaca Bay, TX 1.38

Source: FERC

Supply Sources

Oil Prices Destination Markets

Capital

Source: Waterborne Energy from FERC presentation, April 2014

Data in $US/MMbtu

Source: Enbridge, April 2014


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U.S. energy officials considering easing federal laws that prohibit exports of most crude

§  Rising production of light oil / condensate that is not well-‐matched to current U.S. refinery capacity

§  U.S. currently classifies condensate produced at well crude oil and there is a possibility it be reclassified as condensate which would allow for exports

Implications if export ban is lifted §  Condensate would most likely be exported to Asia as a

petrochemical feedstock

§  Brent (international crude benchmark) and LLS prices would most likely converge as they are both light crude prices on water

§  Build out of new pipelines and terminals to export the crude

§  Likely a decrease in U.S. refined products export volumes and worse economics for U.S. refineries and condensate splitters

Possibility of Lifting Crude Oil Export Ban

Source: RBN Energy, May 2014


Logistics Engineering Supply Chain

This presentation is available at: http://plgconsulting.com/category/presentations/

-‐

Thank You !

For follow up ques-ons and informa-on, please contact:

Graham Brisben, CEO +1 (708) 386-‐0700 / [email protected]

Plg broe presentation final v gb 062314

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