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Adam Bedard, CEOARB Midstream, LLC
Midstream View on Rail
June 2, 2015
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• Growth oriented, infrastructure development companyfocused on early stage, organic development projects
• Provide marketing and logistics services to producersand refiners
• Quantitative analytics drive development strategy• Current Projects
• DJ Basin Energy Hub: Niobrara Connector (“NiCon”)• Midland Basin (Big Spring) Energy Hub: Gateway Project
ARB Midstream Overview
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Projects – Energy Rail Hubs
Permian GatewayNiobrara ConnectorHoward County300 acresISD: Q1 ‘16Pipe Con.Partnership with Hi-Crush (Sand In, Crude Out)
Heart of DJ225 AcresISD: Q4 ‘1579,000 b/dStorage: 200 MbblPartnership with Hi-Crush (Sand In, Crude Out)
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Market Observations
• Uncertainty about future crude oil production adds substantial risk to new midstream projects
• Rail provides a Just-In-Time solution• Flips from “producer push” to a “refiner pull”
• Compression of diffs is changing CBR movement patterns• Rail and Pipe netbacks trending to parity• Quality deducts, pipe specs drive value of segregation• Pipe commitments have a 10x capital need from producers
compared to rail
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UncertaintyWhat is production going to do? It depends on flat price, reduced drilling costs, improved break evens, drilled –uncompleted wells, drilling efficiencies, contracts, crude quality, CapEx, OPEC, etc., etc., etc.,
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What will production do?
• Upside• High grading• Increased drilling efficiencies• Improving Breakevens• Decreased completion costs
• Rig rates have fallen 20-30%• Improving price
• WTI has closed above $50 since Feb 3
• Producers bringing rigs back• Drilled Uncompleted (DUCs)
• Downside• Flat price downside• Declining rig count• Drilled Uncompleted (DUCs)• OPEC production• Iran deal• Iraq increasing exports
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Williston Basin: Crude oil production forecast swings by 500,000 b/d over next 5 years depending on model assumptions
-
400,000
800,000
1,200,000
1,600,000
2,000,000
2,400,000
2,800,000
Crud
e O
il Pr
oduc
tion
(b/d
)
Williston Basin - Crude Oil Production Forecast
514,000
Source: HPDI, ARB Midstream 7
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Uncertainty in production is the difference in some pipes not being full
-
400,000
800,000
1,200,000
1,600,000
2,000,000
2,400,000
2,800,000
Prod
uctio
n an
d Ta
keaw
ay C
apac
ity (b
/d)
Williston Basin: Production and Takeaway Capacity
Rail
Pipe
Refinery
~640,000 b/d of new pipeline capacity announced start of 2017
Source: HPDI, ARB Midstream, Company Presentations 8
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- 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000
1,000,000
Prod
uctio
n &
Tak
eaw
ay C
apac
ity (b
/d)
Williston Basin: Pipeline Capacity and Flows
Pipe Volumes Pipeline Capacity
Pipelines out of the Williston have not been full. The “stacked S/D chart” is overly simply.
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-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
Crud
e O
il Pr
oduc
tion
(b/d
)
DJ Basin – Crude Oil Production Forecast
DJ Basin: Crude oil production forecast swings by 180,000 b/d over next 5 years depending on model assumptions
180,000
Source: HPDI, ARB Midstream, Company Presentations 10
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-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
Prod
uctio
n an
d Ta
keaw
ay C
apac
ity (b
/d)
DJ Basin: Production and Takeaway Capacity
That production swing has huge impact on utilization of infrastructure
Rail
Pipe
Refinery
Producer Push
Refiner Pull
Source: HPDI, ARB Midstream, Company Presentations11
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DifferentialsDifferentials are an incentive, and a risk, for CBR
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Diffs in 2015YTD have come in drastically for WCS and Bakken, but have increased to the East and West Coasts over 2014
Source: Argus
ANSWTI + $8.69WTI + $4.66WTI + $5.19
Bakken@CLBWTI - $5.20WTI -$6.05WTI - $2.48
LLSWTI + $9.35WTI + $3.62WTI + $4.92
BrentWTI + $10.63
WTI + 6.39WTI + 6.65WTI
2013: $98.032014: $93.28
2015YTD: $51.09
2015YTD: Data through May 14, 2015
WCSMaya - $23.85Maya - $11.94Maya - $7.11
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Rockies (P4) has ~ half of the loading capacity as Williston (P2).
PADD 2(1.4 MMb/d)
PADD 4(700 Mbbl/d)
PADD 3
Source: Various Industry Sources14
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Volumes railed from PADD 4 to PADD 3 now exceed volumes from PADD 2 (Williston) to PADD 3
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
Rail
Mov
emen
ts (b
/d)
PADD to PADD Rail Movements
PADD 2 to PADD 3 (b/d) PADD 3 to PADD 3 (b/d) PADD 4 to PADD 3 (b/d)Source: EIA
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Rail can compete with pipeline econs
$15
Cost Includes Trucking, Transload, Rail Car Cost, Freight Rate, PLA, and FSC
Market Rail Offers Better Netback
West Coast If ANS-WTI > $3.50 +/-quality
East Coast If Brent-WTI > $6 +/-quality
Gulf Coast Parity +/- quality
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Rail to West Coast can provide higher netbacks that pipe to Cushing, but diffs are converging
$(5)
$-
$5
$10
$15
$20
$25
$30
Pric
e Di
ffere
ntia
ls ($
/bbl
)
ANS-WTI
Rail
Win
s
Source: Argus, ARB Midstream17
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Forward Curve for ANS-WTI suggests $3.56/bbl, which is nearly parity between rail and pipe
$-
$1
$2
$3
$4
$5
$6
Forw
ard
Curv
e ($
/bbl
)
ANS-WTI
Source: Argus18
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QualityRail enables refiners to pull the barrels they want
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Most of DJ Production growth is API>40
-
50,000
100,000
150,000
200,000
250,000
300,000
Crud
e O
il Pr
oduc
tion
(b/d
)
DJ Basin Colorado - Production By API
API<10 API<20 API<30 API<40 API<50 API<60 API<70 API>=70Source: HPDI
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Pipeline specs leave barrels in the market
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Prod
uctio
n (b
/d)
DJ Basin: Production By API
White Cliffs Specs
PXP “NIO” Specs
Source: HPDI, FERC 21
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Quality Matters: Deduct from posted price -$5 for 60 degree API in Cush
$(16)
$(14)
$(12)
$(10)
$(8)
$(6)
$(4)
$(2)
$-
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73
Disc
ount
from
WTI
($/b
bl)
Prod
uctio
n (b
/d)
DJ Production By API & Gravity Deduct
Prod By quality DeductSource: HPDI, Various refiners 22
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Capital RequirementProducers are in capital conservation mode, and are less eager to make long term commitments
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Pipe vs. Rail
• Rail• Lower capital cost• Fast to market (Site permitting,
construction much faster)• Scalable• Neat barrel• Shorter contracts (2-3 year
commitments vs. 10 years for pipeline)
• Faster transit times which reduces inventory risk
• Access to coastal areas not connected via pipe
• O/D flexibility• Can capitalize on arbitrage• Longer-term opportunities
• Future exports of crude• Public perception & Safety
concerns
• Pipeline• Longer lead time• Higher capital cost• Lower variable costs
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Pipe vs. Rail – Producers have to commit 10X Capital for Pipe
Producer Commitment:Rail: $29,200,000 Pipe: $292,000,000
Cost of Fill: 13,540,000
$-
$100,000,000
$200,000,000
$300,000,000
$400,000,000
$500,000,000
$600,000,000
$700,000,000
$800,000,000
Capital cost
Capital Cost
Rail Pipeline
Assumptions:
Pipeline Capacity: 100,000 b/d
Pipeline Length: 550 miles
Pipeline Diameter: 20”
Producer Throughput: 20,000 b/d
Oil Price: $60/bbl
Term:
Rail: 2 Years
Pipe: 10 Years
Tariff:
Rail: $2/bbl
Pipe: $4/bbl 25
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Market Observations
• Uncertainty about future crude oil production adds substantial risk to new midstream projects
• Rail provides a Just-In-Time solution• Flips from “producer push” to a “refiner pull”
• Compression of diffs is changing CBR movement patterns• Rail and Pipe netbacks trending to parity• Quality deducts, pipe specs drive value of segregation• Pipe commitments have a 10x capital need from producers
compared to rail
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EndAdam Bedard, [email protected]