Shale rail summit final

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


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


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


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


http://www.google.ca/url?sa=i&source=images&cd=&cad=rja&docid=SOCF1ROQEWbOwM&tbnid=FvuCLxhilXUYwM:&ved=0CAgQjRw&url=http://www.ramp-alberta.org/resources/gallery.aspx?galleryimage=965&ei=x8DpUojHFsHcoASJqILoCg&psig=AFQjCNFcddyIwCP7qtRHI-D-Y2Pc4BnO1A&ust=1391137351412286

http://www.google.ca/url?sa=i&source=images&cd=&cad=rja&docid=SOCF1ROQEWbOwM&tbnid=FvuCLxhilXUYwM:&ved=0CAgQjRw&url=http://www.ramp-alberta.org/resources/gallery.aspx?galleryimage=965&ei=x8DpUojHFsHcoASJqILoCg&psig=AFQjCNFcddyIwCP7qtRHI-D-Y2Pc4BnO1A&ust=1391137351412286

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


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)


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


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


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


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)


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


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


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


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


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





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


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)


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 / [email protected]

Terry Bunch, VP of Business Development+1 (912) 289-1039 / [email protected]

http://www.plgconsulting.com/categories/presentations

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