PLG Consulting’s CEO, Graham Brisben presented his presentation Shale Developments: The Evolving Transportation Impacts to the Broe Group on June 23, 2014.

1. Logistics
Engineering
Supply
Chain
Shale
Development:
The
Evolving
Transportation
Impacts
Prepared
for:
June
23,
2014

2. 2
Boutique
consulting
firm
with
team
members
throughout
North
America
§ Established
in
2001
§ Over
100
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
§ Private
equity/hedge
funds/institutional
investors
About
PLG
Consulting
Partial
Client
List
Shale
Development:
The
Evolving
Transportation
Impacts

3. 3
Hot
Topics
v Unconventional
production
continues
to
grow!
v Production
and
forecasts
v Evolving
technology
v Big
picture
impacts:
Energy
v “Energy
Independence”
v Gas
vs.
Coal
v Big
picture
impacts:
Manufacturing
v Natural
gas
feedstock
v Long-­‐term
raw
materials
advantage
v Changing
energy
flows
in
North
America
v Keystone
XL
and
other
pipelines
v Crude
by
Rail
–
growth,
sustainability,
safety
v Energy
exports?
v LNG
v Crude
oil
Shale
Development:
The
Evolving
Transportation
Impacts

4. 4
Unconventional
Production
Continues
to
Grow!
Production
and
forecasts
§ Convergence
of
hydraulic
fracturing
and
horizontal
drilling
in
last
five
years
has
led
to
rapid
growth
in
U.S.
shale
crude,
natural
gas,
NGL
production
§ Improved
Oil
Sands
extraction
processes
have
led
to
rapid
growth
in
Canadian
production
Source:
www.epmag.com
SAGD
Horizontal
Drilling
Source:
Marathon,
February
2014
Shale
Development:
The
Evolving
Transportation
Impacts
Source:
RBN
Energy,
June
2014
Evolving
technology
§ Horizontal
drilling
in
shale
plays
u More
well
bores
per
well
pad
u Optimal
lateral
lengths
u Zone
fracturing
u Shorter,
fatter
fractures
u Productivity
gains
continue!
§ Steam
Assisted
Gravity
Drainage
(SAGD)
in
Oil
Sands
u Two
parallel
wells
are
drilled
u Upper
well
has
high
pressure
steam
injected
u Lower
well
recovers
softened
bitumen
u Improvements
in
this
technology
has
made
bitumen
extraction
profitable
Source:
CAPP
Report,
June
2014

5. 5
Big
Picture
Impacts:
“Energy
Independence”
U.S.
liquid
fuel
demand
projected
to
slightly
decrease
§ Continued
decrease
in
gasoline
demand
§ U.S.
projected
to
still
be
significant
importer
Waterborne
imports
being
displaced
as
shale
oil
and
oil
sands
production
comes
online
§ North
America
to
get
close
to
“Energy
Independent”
as
U.S.
shale
crude
pushes
out
light
crude
imports
and
Oil
Sands
crude
pushes
out
heavy
imports
Infrastructure
built
rapidly
to
help
facilitate
new
energy
movements
Source:
EIA
Annual
Energy
Outlook
Early
Release,
December
2013
U.S.
Petroleum
and
Other
Liquid
Fuels
Supply
&
Consumption
Source:
Enbridge
Investor
Presentation,
June
2014
Shale
Development:
The
Evolving
Transportation
Impacts

6. 6
Big
Picture
Impacts:
Natural
Gas
vs.
Coal
Source:
Devon
Energy
Investor
Presentation,
June
2014
U.S.
Natural
Gas
Cumulative
Coal
Retirement
Demand
Forecast
Natural
gas
now
supplying
27%
of
U.S.
electricity
generation
§ US
coal
electricity
generation
share
capture
has
dropped
10%
from
2006
Adversely
affecting
coal
industry,
railroad
coal
loadings
§ 2013
coal
production
hit
20
year
low
(less
than
1B
s/t)
§ Export
opportunities
diminishing
due
to
weak
demand
in
Europe,
declining
demand
and
competition
in
Asia
Despite
recent
increases
in
prices,
natural
gas
share
capture
expected
to
maintain
or
grow
§ EPA
proposed
mandate
that
power
plants
cut
CO2
emissions
by
30%
by
2030
from
2005
levels
§ Scheduled
coal
unit
retirements;
55GW
through
2020
Shale
Development:
The
Evolving
Transportation
Impacts

7. 7
Shale
Supply
Chain
and
Downstream
Impacts
Feedstock
(Ethane)
Byproduct
(Condensate)
Home
Heating
(Propane)
Other
Fuels
Gasoline
Diesel
Gas
NGLs
Crude
Proppants
OCTG
Chemicals
Water
Cement
Generation
Process
Feedstocks
All
Manufacturing
Steel
Fertilizer
(Ammonia)
Methanol
Chemicals
Petro-­‐chemicals
Other
Petroleum
Products
Inputs
Wellhead
Direct
Output
Thermal
Fuels
Raw
Materials
Downstream
Products
Jet
Fuel
Shale
Development:
The
Evolving
Transportation
Impacts
Impact
years
2010
2011
2012
2013
2016
2018

8. 8
Manufacturing:
Natural
Gas
Feedstock
Source:
RBN
Energy,
January
2014
0
10
20
30
40
50
60
70
80
0
500
1,000
1,500
2,000
2,500
U.S.
Rig
Count
with
Natural
Gas
Production
Gas Oil U.S. Natural Gas Production
rigs
Bcf/d
Source:
Baker
Hughes,
EIA,
PLG
Analysis,
June
2014
Gas
production
has
increased
over
past
five
years
with
a
significantly
lower
gas
rig
count
§ Drilling
productivity
continues
to
increase
production
per
well
and
lower
costs
Abundant
US
gas
recoverable
reserves
US
gas
cost
competitiveness
is
sustainable
§ Supply
will
overwhelm
demand
as
prices
approach
$5
§ US
government
and
capital
constraints
will
likely
limit
LNG
export
to
protect
US
from
world
gas
market
price
Shale
gas
boom
makes
direct-­‐reduced
iron
steel
economical
§ Gas
strips
oxygen
from
iron
ore
to
make
high
purity/quality
pellets
–
lower
cost
vs.
scrap
steel
U.S.
methanol
production
–
10
projects
announced
Natural
gas
is
a
feedstock
for
ammonia
production
§ ~70%
of
cash
costs
(CF
Industries)
§ 12MM
mt
new
domestic
manufacturing
capacity
announced
§ However,
headwinds
include
EPC,
labor,
capital
constraints
Shale
Development:
The
Evolving
Transportation
Impacts

9. 9
Manufacturing:
Long-­‐Term
Raw
Materials
Advantage
Source:
LyondellBasell,
June
2014
US
has
a
large
structural
cost
advantage
due
to
gas-­‐based
ethane
for
downstream
products
§ Europe
and
Asia
are
tied
to
crude-­‐based
naphtha
as
a
feedstock
for
their
downstream
processing
Currently
US
ethylene
cracker
capacity
is
tight
§ Ethylene
prices
are
inflated
in
short
term
but
additional
capacity
expected
in
2016/2017
which
will
moderate
prices
Materials
typically
account
for
60-­‐70%
of
manufacturing
cost
of
goods
sold
(COGS)
§ Total
labor
cost
is
~20%
of
COGS
for
NA
manufacturers
§ Transportation
&
logistics
costs
are
in
“Other”
15%
§ Energy
cost
is
usually
less
than
5%
for
final
manufacturer
but
energy
costs
also
buried
in
raw
material
costs
and
transportation
Shale
Development:
The
Evolving
Transportation
Impacts

10. 10
Changing
Energy
Flows
in
North
America:
Pipelines
Western
Canada
crude
oil
pipelines
§ All
proposed
Oil
Sands
pipelines
are
under
intense
scrutiny
and
subject
to
court
challenges
§ Pipeline
capacity
will
not
match
anticipated
production
because
of
pipeline
delays
and
producers
have
adopted
crude
by
rail
as
a
risk
mitigation
§ Pipelines
likely
built
in
medium
term
(~
2018
operational)
u Trans
Mountain
Express
u Alberta
Clipper
u Keystone
XL
§ Pipelines
likely
delayed
long
term
(2019
and
beyond)
u Northern
Gateway
u Energy
East
US
crude
oil
pipelines
§ Large
pipeline
build
to
Texas
Gulf
Coast
from
Permian
§ Pipeline
capacity
out
of
Bakken
continuing
to
increase
§ Pipeline
build-­‐out
from
Guernsey,
WY
in
progress
New
patterns
in
natural
gas
supply
and
demand
§ Repurposing
and
retirement
of
some
existing
pipelines
§ New
pipelines
being
built
to
transport
gas
out
of
Marcellus
§ Existing
gas
pipelines
are
being
made
bi-­‐directional
to
allow
flow
towards
Gulf
Coast
(not
away),
particularly
for
LNG
export
Source:
Enbridge,
April
2014
Natural
Gas
Movements
Source:
CAPP,
June
2014
Shale
Development:
The
Evolving
Transportation
Impacts

11. 11
Changing
Energy
Flows
in
North
America:
Crude
by
Rail
Three
phases
of
crude
by
rail
phenomenon
in
North
America
§ 2009-­‐2011
u CBR
developed
from
the
Bakken
to
bridge
the
gap
until
pipelines
are
built
u First
unit
train
shipment
in
Dec.
2009
u Destination
market:
Cushing,
OK
WTI
trading
hub
§ 2011-­‐2013
u Ascendancy
of
trading
as
main
growth
driver
in
CBR
u WTI-­‐Brent-­‐LLS
differentials
become
all
important
u St.
James,
LA
LLS
hub
becomes
most
attractive
destination
u Coastal
refineries
begin
rail
receipt
infrastructure
build-­‐out
u Tank
car
market
overheats,
becomes
main
growth
constraint
§ 2013-­‐current
u CBR
from
Bakken
assumes
long-­‐term
structural
role
in
crude
oil
market
u Bakken
CBR
transitioning
to
east
and
west
coast
markets;
LLS
and
WTI
converge
as
Permian
and
Eagle
Ford
growth
floods
USGC
u 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 Rail
Source:
North
Dakota
Pipeline
Authority,
PLG
Analysis,
May
2014
Shale
Development:
The
Evolving
Transportation
Impacts
Source:
PLG
CBR
Forecast
(www.CBRforecast.com),
May
2014
Bakken
&
Oil
Sands
Base
Case
Takeaway
(kbpd)

12. 12
Crude
by
Rail
Regulations
and
Safety
Rail
industry
has
a
strong
safety
record,
but
optics
of
CBR
accidents
are
overwhelming
any
positive
statistics
Industry,
media,
government
focus
on
tank
car
design
§ Canada
announced
three
year
phase-­‐out
of
non-­‐CPC-­‐1232
cars
in
April
2014
§ New
USDOT
and
PHMSA
regulations
expected
early
2015
Railroad
operating
practices,
maintenance
equally
important
§ Railroad
operating
rule
changes
on
hazmat
train
handling
§ Increased
scrutiny,
insurance
requirements
§ May
have
consequences
in
CBR
freight
rates
Increased
product
testing,
documentation
and
traceability
(FRA
directive)
§ Oil
chemistry
varies
by
well/pad
§ Concerns
with
extremely
low
flash
and
boiling
points
§ Bakken
terminals
at
varying
levels
of
compliance
Multiple
risk
assessment
initiatives
underway
Shale
Development:
The
Evolving
Transportation
Impacts

13. 13
Initially
a
political/policy
battle
between
domestic
industrial
users
and
producers
FERC
approved
LNG
export
terminals
§ Cheniere
Energy’s
Sabine
Pass
LNG
in
Sabine,
LA
(under
construction)
§ Sempra
Energy’s
Cameron
LNG
in
Hackberry,
LA
(approved
6/19/2014)
Proposed
US
LNG
Export
Terminals
to
FERC
(in
Bcfd):
There
are
13
other
US
potential
export
terminals
along
with
3
Canadian
proposed
sites
and
10
other
Canadian
potential
sites
LNG
Export
Opportunity
Location
Bcfd
Location
Bcfd
Freeport,
TX
1.8
Elba
Island,
GA
0.35
Corpus
Christi,
TX
2.1
Sabine
Pass,
LA
1.40
Coos
Bay,
OR
0.9
Lake
Charles,
LA
1.07
Lake
Charles,
LA
2.2
Plaquemines
Parish,
LA
1.07
Cove
Point,
MD
0.82
Sabine
Pass,
TX
2.1
Astoria,
OR
1.25
Pascagoula,
MS
1.5
Lavaca
Bay,
TX
1.38
Source:
FERC
Supply
Sources
Oil
Prices
Destination
Markets
Capital
Source:
Waterborne
Energy
from
FERC
presentation,
April
2014
Data
in
$US/MMbtu
Source:
Enbridge,
April
2014
Shale
Development:
The
Evolving
Transportation
Impacts

14. 14
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
and
condensate
splitters
Possibility
of
Lifting
Crude
Oil
Export
Ban
Source:
RBN
Energy,
May
2014
Shale
Development:
The
Evolving
Transportation
Impacts

15. Logistics
Engineering
Supply
Chain
This
presentation
is
available
at:
http://plgconsulting.com/category/presentations/
-­‐
Thank
You
!
For
follow
up
ques-ons
and
informa-on,
please
contact:
Graham
Brisben,
CEO
+1
(708)
386-­‐0700
/
gbrisben@plgconsul-ng.com