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Logistics Engineering Supply Chain
Crude-By-Rail (CBR) Phenomenon: Is Rail
in it for the Long Haul?
Prepared for:
June 25, 2014
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
Institutional investors
About PLG Consulting
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
Partial Client List
3
What is behind the North American energy revolution?
Resources• N.A. shale plays
• Western Canadian oil sands
Technologies examples• Hydraulic fracturing
• Horizontal drilling
• Steam Assisted Gravity Drainage (SAGD)
• Evolving exploration and production technologies
• Tremendous productivity gains drives cost reductions
• Logistics infrastructure “re-plumbing” in
progress
• Product abundance… overabundance
• Imports displaced… exports grow
• Recoverable resources grow…sustainability
• Globally competitive power and material cost structure
• Manufacturing industries grow/return to North America
Recoverable Resources &
Enabling Technologies
Continuous Improvement
Energy Revolution
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
4
Unconventional Energy Resources
North America Shale Western Canada Oil Sands
Source: CAPP, About Oil Sands, June 2013
New production technology developed by small
entities allowing numerous players
“Mass production” methodologies developed
Multi-billion dollar capital investments required by
few players
Production process will harvest oil over long term
Source: EIA, May 2014
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
5
More well bores per well pad
Directional bores to multiple shale layers
Reduced well spacing per acreage – increases well density
Zipper wells – stimulating two wells in tandem
Optimal lateral lengths
Lateral lengths had tripled since the start of horizontal drilling,
but this trend is being challenged by new practices
Zone fracturing
Micro-fracture testing at multiple points vs. one average test
that enables highest extractions of each zone
Shorter, fatter fractures
Bigger holes in casing combined with additional sand and
water use
Productivity gains continue!
Time required for drilling 15,000+ ft. well cut in half in last two
years (9 days vs. 18 days)
Eagle Ford example – new well oil production per rig has
increased by 150% over past 3 years
Lowers break even costs drive profitability improvements
New Fracking Techniques Drive Increased Production At Lower Costs
Source: Marathon, February 2014
Source: EIA Drilling Productivity Report, May 2014
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
6
Oil (bitumen) recovery uses two main methods
- mining and drilling (in situ)
20% of the Oil Sands reserves are close enough to the
surface to be mined using shovels and trucks (3% of oil
sands land area)
80% of the Oil Sands reserves will be recovered in situ by
drilling wells (97% of oil sands land area)
Steam Assisted Gravity Drainage (SAGD) is
most popular method
Two parallel wells are drilled
Upper well has high pressure steam continuously injected
Lower well recovers softened bitumen
Diluent is added to the bitumen (15~30%)
Diluent is very light oil or “condensate”
Enables the product to flow through pipelines and be
loaded into rail cars
Bitumen extraction has become profitable as
extraction technologies improved
Economical at ~ $ 45 - $ 65/bbl
Oil Sands Production Processes
Mining
Source: www.epmag.com
Drilling - SAGD
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
7
The “Re-Plumbing” of Hydrocarbons in North America
Shift from coastal to mid-continent
supply points necessitated “re-
plumbing” the flow of carbon-based
energy in North America
Pipeline reversals, repurposing, new starts
Crude by rail comes of age – born in the Bakken
Waterborne imports being displaced as
shale oil and oil sands production
comes online
Infrastructure built rapidly to help
facilitate new energy movements
Crude Natural Gas NGLs
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
Source: Valero Investor Presentation, March 2014
Source: Enbridge Investor Presentation, April 2014
North American Crude Supply Growth: 2013-2025
8
Crude by Rail Historical Perspective
Three phases of crude by rail phenomenon in
North America
2009-2011
CBR developed from the Bakken to bridge the gap until pipelines
are built
First unit train shipment in Dec. 2009
Destination market: Cushing, OK WTI trading hub
2011-2013
Ascendancy of trading as main growth driver in CBR
WTI-Brent-LLS differentials become all important
St. James, LA LLS hub becomes most attractive destination
Coastal refineries begin rail receipt infrastructure build-out
Tank car market overheats, becomes main growth constraint
2013-current
CBR from Bakken assumes long-term structural role in crude oil
market
Bakken CBR transitioning to east and west coast markets; LLS
and WTI converge as Permian and Eagle Ford growth floods
USGC
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 RailSource: North Dakota Pipeline Authority, PLG Analysis, May 2014
Source: RBN Energy, May 2014
Brent vs. WTI Spread ($/bbl)
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
9
CBR Movements Have Grown Significantly Since 2011 (and Frac Sand)
STCC 14413 (sand) and 13111 (petroleum) Source: US Rail Desktop, Baker Hughes, Surface Transportation Board, PLG Analysis, May 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 2014
Op
era
tin
g O
nsh
ore
Rig
s
Ca
rlo
ad
s H
an
dle
d
Operating On Shore Rigs
All Sand Carloads
Petroleum Carloads
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
10
Future of CBR Depends on:
In addition to the above factors, need to also analyze:
Rail car capacity
Potential regulatory changes – tank cars, testing, rail operational
Rail network capacity
Impact of anticipated price differentials
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
11
CBR Origin Production Forecasts
Shale Development: The Evolving Transportation Impacts
Continued Bakken volume
growth through forecast period
Improved completion techniques
continue to lower break even
costs
High quality crude desired by
east coast refineries
Some experts believe volume
might reach 2MMbpd by 2019
Steady WC growth foreseen
Large capital investments need
to be recovered
SAGD becoming dominant
method with increased
productivity and lowering break
even costs
Takeaway capacity is currently
limited
12
Bakken pipeline capacity
Currently underutilized (~40% for 2013)
But projected capacity to increase to 715 kbpd in
2014 from only 280 kbpd in 2010 (NDPA, Jan. ’14)
Large pipeline build to Texas Gulf Coast
1.45 MMb/d added in 2012-2013 and 1.9 MMb/d to be
added in 2014-2015
Large pipeline projects from Cushing including
Keystone Gulf Extension and Seaway pipelines
Other pipeline projects from Permian, Eagle Ford,
and Midwest
Pipeline build-out from Guernsey, WY
230 kbpd Pony Express pipeline to Cushing (under
construction)
Possibility of twinning Express-Platte pipeline system
through Guernsey to Wood River, IL
US Crude Oil Pipelines
Pipeline Capacity to Texas Gulf Coast
Source: RBN Energy, December 2013
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
Source: North Dakota Pipeline Authority, January 2014, PLG Analysis
40% Utilization?!?!
13
• Current pipelines are at capacity
• All oil sands pipelines are under
intense scrutiny and subject to
court challenges and protests
• None of these developments will
proceed at a pace that will match
anticipated production level
growth
• Canadian Oil Producers adopting
CBR as a risk mitigation measure to
ensure ability to move growing
production to markets (US and
overseas)
Inadequate pipeline capacity will drive
significant CBR growth until pipelines
are commissioned
Western Canada Crude Oil Pipelines
Likely Built Within
Medium Term (~2018)
Trans Mountain Express
(Kinder Morgan)
Alberta Clipper (Enbridge)
Keystone XL (TransCanada)
Likely Delayed
Until 2019 or Later
Northern Gateway
(Enbridge)
Energy East
(TransCanada)
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
14
Announced Crude Rail Terminals Through 2017
85 load terminals
Largest and most efficient
in Bakken
69 unload terminals
Majority on the Coasts and
Mississippi River
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
Are there going to be significant CBR origins outside of Bakken and WC?
15
High Profile Accidents Changing Crude by Rail
Rail industry has a strong safety record, but optics of CBR
accidents are overwhelming any positive statistics
Regulatory approach has focused on:
Prevention – RR operations, track inspections, lower train speeds, increased
track-side technology, route planning requirements
Mitigation – Tank car engineering standards, enforcement of product testing
& classification
Response – Emergency response planning in case of accident
Three key links in supply chain are critical to safety:
At the well – increased enforcement of product testing, documentation and
traceability (FRA directive)
Railroad operating practices and maintenance procedures must be robust
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 and lead time
Tank car design regulations
Expect PHMSA to issue new build engineering standards in late 2014
Three to five year (?) grandfather clause expected
Retrofits may be questionable
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
Example only
16
Brent
ANS
Brent
Sources: EIA, PAALP, Raymond James, CME Group, PLG analysis (Google Earth)
PADD IDemand
2,525kbpd
PADD III Demand8,150
kbpd
PADD VDemand
1,075kbpd
Light/Sweet
Heavy/Sour
Light/Sweet
Heavy/Sour
Light/Sweet
Heavy/Sour
$93(wellhead)
WTI:$101
$6
Spread May 2014
Brent - WTI $7.86/bbl
LLS - WTI $1.80/bbl
WTI - Bakken (Clearbrook)
$5.50/bbl
East Coast Refiners
Pacific Northwest Refiners
N. California Refiners
TX Gulf Coast Refiners
LA Gulf Coast Refiners
S. California Refiners
Marine
Rail
Pipeline
Cushing, OK
Chicago, IL
Clearbrook, MN
St. James, LA
Bakken
Eagle Ford
Permian
Niobrara
Light/Sweet at PNWBakken (rail): $106Brent (ship): $111
Light/Sweet at ECBakken (rail): $108Brent (ship): $110
Light/Sweet at LA GCBakken (rail): $108LLS (local): $102
Light/Sweet at TX GCBakken (pipe): $103Brent (ship): $110WTI (pipe): $106
Light Crude Market and Price Differentials
17
Oil Sands
Hardisty, AB
$81
Heavy/Sour at TX GCMexican Maya (ship): $95WCS (pipe): $99WCS (rail): $105
Sources: EIA, CME Group, Raymond James, PLG analysis (Google Earth)
Mexican Maya
Marine
3,375kbpd
2,525kbpd
PADD III Demand
8,150kbpd
PADD VDemand
Light/Sweet
Heavy/Sour
Light/Sweet
Heavy/Sour
Heavy/Sour
Light/Sweet
PADD IIDemand
TX Gulf Coast Refiners
Pacific Northwest Refiners
California Refiners
MidwestRefiners
Rail
PipelineClearbrook, MN
Chicago, IL
Spread Jan. 2013 May 2014 Change
Mexican Maya - WCS $38.07/bbl $14.51/bbl -$23.56/bbl
Heavy Crude Market and Price Differentials
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
18
Bakken and Oil Sands Crude Oil Takeaway Forecast
Source: www.CBRforecast.com
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2013 2014 2015 2016 2017 2018
Base Case Takeaway (kbpd)
Pipeline
Crude by Rail
Local Refining
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
19
Refined Products Market Dynamics
U.S. shifted to net exporter of refined
products
Mitigating the impact of declining domestic demand
International demand increasing, especially for diesel
Exports of diesel to Latin America and Europe
Gasoline exports to Latin America
Splitters in the Gulf Coast could relieve some
pressure with potential 445kbpd of capacity
“Processing” of condensate into a petroleum product
Splitters at risk if crude export ban lifted
Source: Valero Investor Presentation, March 2014
Source: Valero Investor Presentation, March 2014
Source: Valero Investor Presentation, March 2014
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
20
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
Possibility of Lifting Crude Oil Export Ban
Source: RBN Energy, May 2014
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
21
Tailwinds
New WC pipelines will likely be
delayed
Increasing Bakken & Oil Sands
production
Additional imports still to be
displaced in US east, west, GC
TX shale plays increasing light
crude volume to USGC
More terminals coming online
Potential for US export regulation
easing
Crude By Rail Future Drivers
Headwinds
Impact of oversupply of light crude in
the US 2014~ (market impact?)
Environmental focus at terminals
causing delays in permitting (CA, WA)
Tight railcar supply due to new rail car
regulations impact
WC pipelines will eventually be built
(2018 or beyond) and take CBR share
Potential regulatory backlash from
future disasters? (biggest wild card)
Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?
Logistics Engineering Supply Chain
This presentation is available at:www.plgconsulting.com/categories/presentations
-
Thank You !For follow up questions and information,
please contact:
Taylor Robinson, President+1 (508) 982-1319 / trobinson@plgconsulting.com
Terry Bunch, VP of Business Development+1 (912) 289-1039 / tbunch@plgconsulting.com
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