Panacea or Purgatory… What Roll Can Rail Play in The Delivery of Crude?

Discussion Agenda

• Assumptions– Growth of Canadian oil supply– Key demand growth areas– Market structure: pricing

• Strategic factors for sustainable crude shipments by rail

– Market access: Pipeline reach v. rail reach– Pipeline v. Rail business model– Comparative infrastructure requirements– Public perception and regulatory considerations: Pipeline v. rail

• Cost structure: focus factors to enhance competitiveness and sustainability of crude by rail

– Channel-to-market cost structure: “cost to serve”– Rail factors that reduce channel-to-market cost– Pipeline v. rail infrastructure requirements– Efficiency factors; challenges & considerations for crude by rail

• Strategic conclusions regarding crude by rail

Assumptions:Western Canada Oil Production

Forecast

2,000

1,000

0

3,000

4,000

5,000

6,000

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Western Canada Light and

Medium Canada Oil Sands

Mining

AB & SK Conventional

Heavy Canada Oil Sands

In-Situ

THOUSAND BPD

7,000

Forecast

Total Western Canada projected oil production exceeds 6%AGR

through 2020, in spite of declining conventional oil production

Source: CAPP; “2012 Crude Oil Forecast, Markets & Pipeline

Assumptions:Growing Export Demand

1,000

900

800

700

600

1,100

2004

2005

2006

2007

2008

2009

2010

2011

2012

THOUSAND BPD

1,200

2000

2001

2002

2003

Canadian Oil Exports to USA have grown at 4.3% AAGR since 2000, with accelerated growth at 6.5% AAGR in

last 3 years

Source: CAPP; “2012 Crude Oil Forecast, Markets & Pipeline

Assumptions:Oil Demand by Region

Source %

US Canada Other 54% 43% 3%

PADD II

Sources: US EIA, Statistics Canada

Source % US Canada

Other

PADD I 5% 21% 75%

Source % US Canada

Other

PADD III 34% 2% 64%

Source % US Canada Other

PADD IV 61% 39%0%

Source % US Canada

Other

PADD V 49% 8% 43%

Source % Canada OtherON & PQ

36% 64%Source % Canada Other

ATLANTIC

22% 78%

Assumptions:Regional Benchmark Pricing

WCS = Western Canada Select (increasing) ANS = Alaska North Slope (declining)SJVH = San Joaquin Valley Heavy Maya = Mexican Maya (declining)LLS = Louisiana Light Sweet

Export demand & west coast refinery demand compared to declining supply support oil-by- rail

growth

Midcontinent PL network and

reversed central Canada

PL cannot supply east

coast: PL by rail demand

sustainable

ANS +$17

SJVH +$12

WTI $96

Brent +$17

WCS ($32)

Jan 28 Crude Prices relative to WTI

Source: CAPP, Bloomberg

Bakken ($3.5)

LLS +$18Maya +$6

New PL capacity out of Cushing will reduce need for rail to USGC by 2015

Pipeline Business Model

Intermediate Terminal

Producer•Transportation & terminalling cost varies by

Destination Terminal

Pipeline or truck

Refinery

Pipeline

Pipeline

– Founding or non-founding shipper status

– Distance– Intermediate services (I.e.,

blending)• Generally long-term commitments

• Fixed destination options

• Working capital– Residence time to market = 4 – 8 weeks

– Substantial working capital in line fill• “All in” cost to move oil to

market:$8 – $12 USD/BBL or is it?

Bitumen transport cost is higherthan quoted tolls for 30/70 dilbit

RAIL IS LESS

Grizzly Oil Sands 9

Firm (10 – 20 yr commitment)

Interruptible (150% of firm)

Pipeline Toll Hardisty - USGC $ 8.00 $12.00

Pipeline Toll Field - Hardisty $ 2.00 $ 3.00

Pipeline Storage $ 1.00 $ 1.00

Line Fill 40 days $ 1.00 $ 1.00

Dilbit Pipe Total $12.00 $17.00

Diluent Transport Mt Belvieu-Edmonton $10.00 $15.00

Diluent Transport Edmonton-Field $ 2.00 $ 3.00

Diluent Penalty at (30/70) of sum of above $10.28 (.428*$24) $14.98 (.428*$35)

Total Bitumen Transport Cost $22.28 $31.98

Pipeline Business Model• Four principal pipeline systems originate from

Edmonton/Hardisty; Combined takeaway capacity = 3.5 Million BPD– Enbridge Mainline: 2.3 million KBPD– Kinder Morgan Trans Mountain: 300 KBPD; Kinder Morgan Express:

280 KBPD– Trans Canada Corporation’s Keystone Phase 1&2 : 590 KBPD

• Proposed expansions (not approved) = 1.9 Million BPD– Enbridge Northern Gateway:

• Bruderheim to Kitimat 525-850 KBPD; Completion 2018?• Public acceptance/project approval in question

– Enbridge Alberta Clipper:• Hardisty to Superior, WI: increase 450 kbld to 570 KBPD• Southern Access downstream of Clipper: increase from 400 KBPD to 560

KBPD; 2014

– Trans Canada Keystone Expansion: increase to 835 KBPD; Completion 2015?

– Kinder Morgan Trans Mountain: increase to 750 KBPD; Completion 2017?

• Public acceptance/project approval in question

• All pipelines move product to PADD II, PADD III or BC coast for export

Sources: CAPP, Publicly available Information

Pipeline Business Model: Advantages

• Established mode of transporting oil to market

• Efficient for rateable high volume shipments

• Long-term channel-to-market cost structure certainty

• Cheapest way to move standard grades of oil to pipeline accessible markets

Pipeline Business Model: Disadvantages

• Two-tier pricing structure– Advantaged “founding shipper” pricing requires long-term take-or-pay

commitment– Pricing for non-founding shippers materially higher

• Origin and destinations are fixed and inflexible: no market options– Ongoing opportunity costs incurred for not having a flexible channel-to-market

– Oil transactions are limited to refineries on the pipeline

• Pipeline specifications are fixed and commoditized– No “boutique” niche product opportunities– Diluent required to transport bitumen

• Pipeline outages constrain production and/or depress oil prices– Fully transparent pricing market enhances buyer power

• Pipeline transit is slower than rail: higher working capital cost

Rail Business Model

Source Terminal

Producer

Pipeline or truck

Refinery

Rail to Refinery

• Transportation & terminalling costs vary by– Railcar cost: railcar lease buying power

– Distance, source and destination (rail route)– Pipeline v. truck to source terminal– Trucking distance– Rail carrier competitive tension– Freight buying power and shipment volume– Backhaul or no backhaul (truck and/or railcar)– Railcar payload: API 8 = 500 BPRC; API 18 = 600

BPRC; dilbit can move with little or no diluent

• Generally short- to mid-term commitments– Terminal commitment

– Railcar lease commitment

• Flexible destination options– Some products require steaming at destination

• Working capital en route 5 – 14 days

• Cost to move oil to market:$15-20 USD/BBL

Potential diluent backhaul

Potential diluent backhaul

Rail Business Model: Wide Range of Destination Options

• Edmonton to Chicago (CN and CPR):– Chicago: Connect south to USGC or east to US eastern seaboard

• Edmonton to Eastern Canada destinations (CN and CPR):– Ontario (CN & CPR)– PQ (CN & CPR)– New Brunswick (CN)

• Eastern US destinations direct (CN and CPR)

• West to Vancouver and Asia (CN and CPR)

• South to PADD III, PADD II, California (CPR to BNSF)

• South to Minneapolis to Union Pacific & western US destinations (CN & CPR)

• South to Kansas City to KCS & USGC destinations (CPR)

• CN connections to multiple US destinations through Noyes, MN; Superior, WI; Buffalo, NY

• CN direct to USGC destinations

Rail Business Model: Advantages

• Flexible market access facilitates capturing benchmark pricing differentials

• Scalable from 600 to 60,000 BBL per shipment

• Ability to preserve “niche” product specifications – less commoditization

• Ability to ship bitumen and very heavy conventional crudes with little or no diluent

• Shipper anonymity – not a fully transparent pricing market

• No “public consultation” process to initiate shipping

• Lower capital cost to support rail channel-to market, therefore shorter expected commitments than pipeline

• Opportunity to enhance channel-to-market reliability with multiple serving railroads

• Fast shipment time: 5-14 days to market

• Proven model: Bakken success

Rail Business Model: Capturing the Oil Price Spread

WTI WCS

WCS Discount v.

WTI USD %

WTI

USD/BBL

USD/CAD

Source: Bloomberg Industry Blended Index

2005 $56.56 $36.24 -$20.32 -36% 0.8260

2006 $66.22 $45.04 -$21.18 -32% 0.8818

2007 $72.31 $49.62 -$22.69 -31% 0.9343

2008 $99.65 $79.59 -$20.06 -20% 0.9428

2009 $61.80 $52.14 -$9.66 -16% 0.8798

2010 $79.53 $65.30 -$14.23 -18% 0.9710

2011 $95.12 $77.97 -$17.15 -18% 1.0114

2012 $102.93 $81.81 -$21.12 -21% 0.9980

Rail Business Model: Capturing the Oil Price Spread

Rail Business Model: Disadvantages

• More expensive to move commodity oil to markets that are well served by high-volume pipelines

• Tank car availability impacts time required to initiate shipments

• Tank car commitments up to 7 years may be required

• Truck availability (if trucking to source terminal)

• “Emerging” market in Western Canada; limited capacity

• “Emerging” (growing) destination unloading capacity

• Oil producer may not have in-house rail transport expertise and buying power

• Supply chain costs negotiated for 1 – 5 years

Comparative Infrastructure Requirements

• Pipeline:– Multi-billion dollar investment– Substantial public interface, approval and permitting

required– 3 – 10 year lead time

• Rail:– $1 - $150 Million investment (depending on throughput

capacity, storage, pipeline connection, etc.)– Limited public interface, approval and permitting required– 3 – 24 months lead time

Public Perception & Regulatory Considerations

Pipeline: Rail:• Substantial, high visibility

public opposition to new pipeline projects

• Regulatory hurdles to new pipeline projects

• Long project lead times

• Pipeline spills can result in large quantities of product loss, environmental impact and high visibility

• Rail is an accepted and proven mode of transport with significant track infrastructure in place across North America

• Proven rail networks efficiently move other energy commodities such as coal

• Product loss in rail incidents has been typically limited to 1 to several railcars; limited loss, limited environmental impact, limited visibility

Considerations for developing Rail Facility

• Design for minimizing cost, maximizing efficiency:– 24 x 7 x 365 operation– Minimum tank car residence time to maximize railcar utilization– Pipeline-to-rail staging tank capacity– On-site storage capacity for products delivered by truck– High truck unloading capacity to minimize truck waiting time– High throughput efficiency to minimize railcar “dwell” time– Dual serving railroads– Geographic location– Accurate billing meters– Ability to facilitate truck and/or railcar backhauls– Ability to handle “niche” products such as very heavy conventional and

minimally diluted bitumen– Third-party logistics management, railcar supply, repair and cleaning

service offerings

Conclusions:Strategic Oil-by-Rail Approach

• Rail-to-market is a viable long-term oil marketing strategy

• Not all oil markets are competitive for rail delivery of oil

• Oil-by-rail costs can be optimized by accessing “buyer power” through third-party logistics management services

• Oil netbacks can be enhanced for sellers and purchase prices optimized for buyers by:– Target rail shipments to under-serviced pipeline markets

– Target rail shipments to markets where benchmark price differentials enhance oil value at delivery point

– Moving oil from niche producers without pipeline access and niche producers with unique product specifications by rail

– Developing multi-mode marketing strategies to secure the advantages of both pipeline and rail shipments

TRANSPORTINHEAVY

insulated 95% - 100%

pipeline 70%

general purpose 85% - 90%