plg bmo shale energy presentation
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Professional Logistics Group
Oil & Natural Gas: The Evolving Freight Transportation Impacts Prepared for
BMO Equity Research
January 14, 2013
» Boutique consulting firm specializing in logistics, engineering, and supply chain § Established in 2001 § Over 80 clients and 200 engagements § Significant shale development practice since 2010
» Headquarters in Chicago USA, with team members throughout the US and with “on the ground” experience in: § North America / Europe / South America / Asia / Middle East
» Consulting services § Strategy & optimization § Assessments & benchmarking § Transportation assets & infrastructure § Logistics operations § M&A/investments/private equity
» Specializing in the logistics of § Oil & gas § Chemicals & plastics § Wind energy & project cargo § Bulk commodities (minerals, mining, agricultural) § Industrial & consumer goods
About PLG Consulting
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The Shale Development Gold Rush
» Other recent energy “boom” events with major transportation impacts
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» Common characteristics § New technology breakthroughs and/or dramatic market shifts § Speed to market is paramount § Rush of capital and new players § Continuous change and evolution in both technology and markets § Logistics and related infrastructure of greater importance in shale development, and
therefore a major platform for competition and strategy
Hydraulic Fracturing and Horizontal Drilling
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Hydraulic Fracturing Equipment Staging Area
Source: JPTOnline.org
Frac Tanks/Fluid Storage
Chemical Trucks
Blender
Sand Storage Unit
Pump Trucks
Data Van
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North American Shale Plays
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Shale Driving Growth in Natural Gas and Crude Oil Production
» 1,762 rigs in operation as of January 4, 2013 » Rush of capital into the industry » 700% increase in shale gas production since 2007 » Domestic oil production at 14-year high (6.8MM bbl/d) » “Unconventional” becomes “conventional” by 2015
7 Source: EIA 2012 Source: Baker Hughes 2013
GAS OIL THERMAL
Source: EIA 2012
Oct-‐2012 6820
3000 3500 4000 4500 5000 5500 6000 6500 7000 7500
Jan-‐98
Aug-‐98
Mar-‐99
Oct-‐99
May-‐00
Dec-‐00
Jul-‐0
1 Feb-‐02
Sep-‐02
Apr-‐03
Nov-‐03
Jun-‐04
Jan-‐05
Aug-‐05
Mar-‐06
Oct-‐06
May-‐07
Dec-‐07
Jul-‐0
8 Feb-‐09
Sep-‐09
Apr-‐10
Nov-‐10
Jun-‐11
Jan-‐12
Aug-‐12
Million Ba
rrels/Da
y
U.S. Monthly Crude Oil Produc@on
Chemical Feedstocks
Natural Gas & Petrochemical Supply Chain
Consumers
Petrochemicals
Aromatics Ammonia Many Others
Olefins
Ethylene Propylene Butylene
Polymers
Polybutadiene Polypropylene Polyethylene
Manufacturing Intermediates become
consumer and industrial products
Natural Gas
Power Generation
Industrial Use
Consumer Use
Petrochemical Processing Refined
Crude Products
Process
Product
Logistics Flow 8
NGLs
New “game changing” N.A. cost
advantage due to shale development
Potential Plastics Supply Chain
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Gas Wells
Cracker Resin Plants
Lordstown Assembly
Plant
Component Manufacturing
0
500
1000
1500
2000
2500
$/To
n
HDPE Calculated Cost
Sources: CMAI, TopLine Analytics, and Alembic analysis, 2012
» Low cost natural gas and NGLs with local processing would give this region a tremendous material and manufacturing cost advantage
» Oversupply of ethane expected to continue indefinitely
Shale Gas Will Drive Steel Manufacturing Comeback in US
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» Shale gas boom makes direct-reduced iron steel economical § DRI plants viable with growth in shale gas § Not new technology, but preferable with lower cost natural gas § DRI process uses natural gas in place of coal to produce iron § Cost of production 20% lower per ton
» U.S. Jobs and International Investment § Steel production in the U.S has shrunk 3.4% since 2008 – Compare to 14% growth in steel production internationally
§ At least five new DRI steel plants being considered in the U.S. § Both domestic and international firms investing in the technology § Initial investments create up to 500 jobs and 150 permanent
employees
» Reciprocal Growth
§ Increased demand for U.S. steel creates greater demand for U.S. gas § Joint venture between Nucor Corp. and Encana Corp. commits $3
billion to development of new gas wells to support DRI plants § DRI-derived steel of higher quality than that created from recycled
scrap, further driving demand
Shale Gas Development Impact on Fertilizer Market
» Natural gas as ammonia feedstock for fertilizer § Ammonia produced from cheap natural gas is used in fertilizers § Reducing the cost of natural gas drives down ammonia and, by
extension, fertilizer costs § Cheap U.S. natural gas means billions in investment for new
domestic fertilizer plants
» Natural gas glut could be panacea for American farmer’s fertilizer needs § Increased demand for corn, soybeans has driven fertilizer costs
higher § Excess natural gas supply can be utilized to produce greater volumes
of fertilizer more economically
» New technology helps reduce natural gas waste
§ Mobile ammonia plants being developed could allow ammonia (for use in fertilizer) to be produced at well heads
§ Mobile plants capture natural gas that would otherwise be burned off § Reducing fertilizer costs would help drive agricultural commodity
prices lower by reducing capital requirements for American farmers
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Shale Gas Development Impact on Fertilizer Market (continued)
» Natural gas is a feedstock for ammonia production § Ammonia produced from natural gas is used in fertilizer production § Reducing the cost of natural gas drives down ammonia and, by
extension, fertilizer costs
» Cheap U.S. natural gas means billions in investment for new domestic fertilizer plants, displacing imports – Orascom’s Iowa Fertilizer Company new plant in Wever, Iowa – CHS’ new plant in Spiritwood, North Dakota – Ohio Valley Resources new plant in Spencer County, Indiana – Yara’s new plant in Belle Plaine, Saskatchewan – North Dakota Grain Growers Association’s new plant to be located
in the Williston Basin – CF Industries’ expansions at Donaldsonville, Louisiana and Port
Neal, Iowa – PotashCorp’s resumption of ammonia production at Geismar,
Louisiana – Expected announcement from Agrium, with plant likely in either
Kentucky or Missouri
» If announced plant constructions are completed, imports of nitrogen-produced fertilizers could be reduced to “near zero” by 2018
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Hydraulic Fracturing Materials Inputs and Logistics – Per Well
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Materials
Chemicals
Clean Water/ Cement
Proppants
OCTG (Pipe)
Source to Transloading
2
Local source
40
5
Transloading to Wellhead Site
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~1,000
160
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47 Total Railcars
~1,200 Total Truckloads
Oil/Gas/NGLs
Truck, Rail, Pipeline
Waste Water
~500 Total Truckloads
Correlation of Operating Rig Count with Sand and Crude Shipments
14 STCC 14413 (sand) and 13111 (petroleum) Data sources: US Rail Desktop, Baker Hughes
1,695
1,814
1,270
886 939
1,073
1,299
1,467
1,604 1,665 1,691
1,798 1,911
1,972 1,948 1,864
1,691
0
500
1000
1500
2000
2500
0
20,000
40,000
60,000
80,000
100,000
120,000
2007 Avg. 2008 Avg. 2009 2010 2011 2012 2013
Ope
ra@n
g Onsho
re Rigs
Sand
Carload
s
Quarterly Data
OperaEng On Shore Rigs All Sand Carloads Petroleum Carloads
All Sand Handled by Railroad
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0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2008 2009 2010 2011 2012
Carlo
ads
Quarterly Data
BNSF
UP
NS
CN
CPRS
CSXT
KCS
STCC 14413 Source: US Rail Desktop
Sand Mining Overcapacity: New Reality
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» Proppant processing and shipping activity in Western and West Central Wisconsin counties § Chippewa § Barron § Trempealeau § Jackson § Monroe § Crawford
» New announced projects § Superior Silica Sand – Clinton, WI
§ $35MM main line rehabilitation by CN
§ U.S. Silica – Sparta, WI § Smart Sand – Oakdale, WI § Pattison – Prairie du Chien, WI
» Minnesota areas also active § Southeastern border along Mississippi
River § Western Twin Cities
» Established Illinois companies seeing significant upturns in volumes and financial returns
Source: Federal Reserve Bank of Minneapolis, July 2012; PLG analysis
Changes in Rail Shipment Pricing Q3 2011 vs. Today - Sand
» Since Q3 2011, have seen an overall rail price increase of 10 - 14% in public pricing (varies by corridor)
» In the 600-1,300 mile range, rates vary from $0.045 - $0.074 per ton-mile for manifest shipments
» Shippers who are willing to ship unit trains and make volume commitments have realized significant savings with longevity over public pricing
» Western carriers are driving single line hauls to Eagle Ford via pricing differentials
» Canadian and Eastern carriers are aggressively working to grow their
markets by providing very competitive pricing and securing sand originations § CN/Superior Silica Sands – Poskin, WI
» Major sand providers are establishing “in the play” transloading facilities to provide ready access to product § U.S. Silica - East Liverpool, OH
17 Source: PLG analysis
Sand Railcar Market Conditions
» New-build market has run its course § Much smaller backlog – 3Q 2011: 10,000 cars, ten month wait – Today: no significant wait
§ Significant drop off from ~14,000 new cars per year – 2013 closer to 2,000-3,000 new cars
§ No new spec building by lessors – all deal specific now § Normalized pricing: older cars less expensive than new § Some new cars going into storage
» Lease market also post-peak § Available inventory from multiple directions – Lessors, builders, oversubscribed shippers
§ Existing 286K cars available now § Cars with sub-optimal specs (grain, <286K, cement) are being
phased out of frac sand fleet § Creditworthiness an important criteria
» Long-term horizon § Some signs of activity in cement market, may help offset
remaining surplus of sand cars § Optimism in industry that sand car demand will strengthen in
2013
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Processed Sand Total Delivered Cost
Source: PLG analysis 19
» Benchmark cost with well-executed performance § Example unit train movement from Wisconsin to
Texas with total delivered cost of approx. $180/ton § Logistics drives ~60% of total delivered sand cost
» Potential for significant cost add-ons caused by strategic and tactical issues
§ Sub-optimal logistics network design or infrastructure - Manifest service (rail) - Multi-carrier vs. single line haul (rail) - Equipment/driver shortages
§ Poor planning and/or execution - Rail and/or truck demurrage costs – Performance penalties
§ Uncompetitive sand price § Poor sand quality
Shale Play Product Flows Outbound
» Natural Gas § Majority via pipelines, some trucks
» Natural Gas Liquids (NGLs) § Requires processing (fractionation) § 3-9 gallons/MCF (thousand cubic feet)
– Ethane 63% – Propane 22% – Butane 8% – Pentane 5% – Other 2%
» Crude Oil § Bakken play as a model § Surging Permian and Eagle Ford development § Strong potential for Utica play (currently 2-3 years
behind Bakken)
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0
100000
200000
300000
400000
500000
600000
1952 1962 1972 1982 1992 2002 2012
Bar
rels
Per
Day
Year
Bakken Oil Production - History
Source– North Dakota Industrial Commission July 2012 North Dakota Department of Mineral Resources July 2012
First outbound unit train shipment December, 2009
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~682,000 BPD October 2012
Bakken Oil Production - Forecast
Source: North Dakota Oil and Gas Division May 2012
Today
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» Bakken oil is a light, sweet crude with low sulfur content and low viscosity § Requires less downstream processing
§ Equal in quality to benchmark WTI
§ Higher gas, jet, and distillate yield than peer crudes
» Already a “game changer” in global oil market § Bakken and WTI trading at ~$20/bbl less than Brent
§ Increased unit train receiving capacity (St. James, LA, Pt. Arthur, TX, Cushing, OK, Albany, NY, Philadelphia, Bakersfield, CA, St. John, NB, Anacortes, WA, Ferndale, WA) coming on line to displace waterborne crudes
§ Some analysts forecasting Canada and US crude oil self-sufficiency and prices well below global levels by 2017
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Bakken vs. Peer Crude Oils
Source: RBN Energy 2012
Source: EIA 2012
» Change in past 14 months § November 2011:
– 2012 Bakken discount vs. WTI have ranged from $8-12 bbl
– Undervalued due to logistics constraints “stranding” the oil
§ January 2013:
– Bakken vs. WTI near even to ~$4 discount due to improved logistics
» Significant expansion of crude by rail terminal capacities in 2011- 2012
» Crude by rail now a major market factor » Tank car availability/lead time - major short
term entry barrier
§ Current order backlog runs to 2Q 2014
§ Major purchases by oil majors and midstream companies
§ Extremely tight market with very high lease rates
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Bakken Crude No Longer “Stranded” Due to Logistics
Bpd = Barrels per Day
Crude by Rail Share
ND Production (bpd)
Crude by Rail (bpd)
Dec. 2010 15% 273,800 41,070
Dec. 2011 23% 470,290 108,167
June 2012 40% 610,000 244,000
August 2012 48% 635,127 317,564
October 2012 50% 682,393 341,197
Source: North Dakota Industrial Commission, PLG analysis
Crude Oil by Rail Volume Growth
25
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
2008 2009 2010 2011 2012
Carlo
ads
Quarterly Data
BNSF
UP
CPRS
CN
CSXT
KCS
NS
Source - US Rail Desktop
Facility Location Loading Capacity (Barrels per Day)
Rail Carrier
Musket Corp Dore 60,000 BNSF Savage Services Trenton 60,000 BNSF Red River Supply Williston 10,000 BNSF
Hess Oil Tioga 60,000 BNSF Plains All American Manitou 65,000 BNSF
Bakken Transload (Plains) Ross 10,000 (65k Q2 2013) BNSF EOG Stanley 65,000 BNSF
Basin Transload Zap 20,000 BNSF Bakken Oil Express Dickinson 100,000 BNSF
Enserco Gascoyne 10,000 BNSF Rangeland Epping 65,000 BNSF Enbridge Berthold 10,000 (70k Q2 2013) BNSF
Great Northern Fryburg 65,000 BNSF
BNSF Total Capacity 600,000
Global Stampede 60,000 CP Dakota Plains New Town 40,000 CP
US Development Van Hook 35,000 CP
CP Rail Total Capacity 135,000
Total Crude by Rail Capacity 735,000
(Existing and planned by December 2012)
Crude Oil by Rail – North Dakota Terminals
Source: PLG analysis 26
North Dakota Class I Railroads and Crude Oil Terminals
27
Shale Related Rail Traffic Still Small Relative to Coal Volumes
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Sand
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2008 2009
2010 2011
2012
Carlo
ads
Quarterly Data
Rail Shipments: Coal, Sand & Crude
Sand
Crude
Coal
Source: US Rail Desktop
Crude Oil Pipelines – Existing and Future
Source – CAPP Report 2011 29
30 Bpd = Barrels per Day
Bakken Area Outbound Pipelines
Current Capacity ( Q1 2013) - 440,000 bpd
Announced pipeline capacity expansions
Company Project BBL's/day Expected in Name Capacity service date
Enbridge Berthold Expansion 145,000 1Q 2013 Sandpiper 225,000 2015
Plains All American Bakken North 50,000 1Q 2013
Saddle Butte High Prairie 150,000 1Q 2014
Oneok Partners Bakken Express 200,000 2015
Trans Canada Bakken Marketlink 100,000 2015 Keystone XL 830,000 2015?
Total New Pipelines: 1,500,000 NEW pipeline capacity expected operational:
2013 195,000 2014 150,000 2015 325,000 TBD (K XL) 830,000
Source: PLG analysis, North Dakota Governors Pipeline Summit 2012 – presentation materials 30
Bakken Express ‘postponed’ November 30, 2012 due to lack of
subscription
Bakken Production vs. Outbound Logistics: 2012–2014 Projection
Year
ND Production Forecast (Bpd)
Pipeline Capacity*
Rail Terminal Capacity
Rail Carrier Capacity
ND Refinery Consumption
Total Outbound &
Refinery Capacity
Excess Logistics Capacity
2012 700,000 440,000 730,000 1,200,000 60,000 1,230,000 530,000
2013 790,000 635,000 800,000 1,300,000 60,000 1,495,000 705,000
2014 860,000 785,000 850,000 1,350,000 60,000 1,695,000 835,000 Source: PLG Analysis
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* Excludes Keystone XL Bpd = Barrels per Day
Crude Oil by Rail vs. Pipeline
» Current pipeline options ~ 30-45% lower cost vs. rail
» Near-term offsetting rail advantages:
§ Site permitting, construction is much quicker and easier
§ Much lower capital cost and scalable
§ Shorter contracts
§ Transit to destination - 5-7 days via unit train vs. 30+ days via pipeline (between Bakken and US Gulf Coast)
§ Origin and destination flexibility/opportunistic to new market niches
» Long-term challenges that will affect rail volumes and margins:
§ Pipeline expansions
§ Bakken-WTI price equilibrium
§ Any significant narrowing of price differential between Brent and WTI
$6.50
$11.50 $10.50
$14.70
$-‐
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
Pipeline to Cushing
Rail to Cushing
Pipeline to Pt Arthur
Rail to Pt Arthur
Dol
lars
Per
Bar
rel
Source: PLG analysis
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Crude Oil Logistics – Near Term Outlook
» Logistics capacity exceeds production and will continue to keep pace in future
» Crude by rail cost premium of .5x – 2.0x is not currently deterring volume moves
» Crude by rail is a key outbound logistics mode near-term; pipeline share of outbound Bakken production will grow annually and volume will settle out by direction (rail: east-west; pipeline: north-south)
» Expected Seaway pipeline 250,000 bpd expansion in 1st quarter 2013 will relieve much Cushing congestion and likely will put additional pressure on railroad pricing to compete with expanded pipeline economics and availability
» No pipelines are likely to replace rail in the Bakken supply chain to the East and West coasts
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Looking Ahead: Key Questions for Oil & Gas Supply Chain
» Shale play dynamics § Influenced by supply/demand market fluctuations § Crude vs. dry gas vs. NGL § Potential environmental concerns
» Where are the destinations for further processing? § Crude oil refineries – sweet vs. sour processing § NGL fractionation § Petrochemical manufacturing investments § Increased CNG demand § Crude, NGL, and LNG exports
» Will transportation services, assets, and infrastructure continue to meet demand? § Pipeline locations and capacity § Road and rail infrastructure § Waterway availability § Fleet assets § Terminals and storage
34 Source: Waterborne Energy Inc. Data in $US/MMBtu
16RBN�Energy�– 2012�
NGL�and�Natural�Gas�Pipelines
Mariner�West
ATEX
Mariner�East
?BlueGrass?
Nexus
Dawn
Source: RBN Energy, LLC
Thank You! For follow up questions and information, please contact:
Taylor Robinson, President
+1-508-982-1319 / [email protected]
Graham Brisben, CEO +1-708-386-0700 / [email protected]
Jean Arndt, Vice President
+1-630-505-0273 / [email protected]
Jeff Dowdell, Senior Consultant +1-732-995-6696 / [email protected]
Gordon Heisler, Senior Consultant
+1-215-620-4247 / [email protected]
Jeff Rasmussen, Senior Consultant +1-317-379-5715 / [email protected]
This presentation is available at: WWW.PROLOGISTICSGROUP.COM
Professional Logistics Group
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