Shale rail summit final

Logistics Engineering SupplyChain
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 FrackingTechniques 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

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 RailTransport
ND Production Crude by Rail
Source: 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
OperatingOnshoreRigs
CarloadsHandled
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 toTexas 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 toWood River, IL
US Crude Oil Pipelines
Pipeline Capacity toTexas 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
significantCBR 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 RailTerminals
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 I
Demand
2,525
kbpd
PADD III
Demand8,150
kbpd
PADDV
Demand
1,075
kbpd
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 PNW
Bakken (rail): $106
Brent (ship): $111
Light/Sweet at EC
Bakken (rail): $108
Brent (ship): $110
Light/Sweet at LA GC
Bakken (rail): $108
LLS (local): $102
Light/Sweet at TX GC
Bakken (pipe): $103
Brent (ship): $110
WTI (pipe): $106
Light Crude Market and Price Differentials

17
Oil
Sands
Hardisty,AB
$81
Heavy/Sour at TX GC
Mexican Maya (ship): $95
WCS (pipe): $99
WCS (rail): $105
Sources: EIA, CME Group, Raymond James, PLG
analysis (Google Earth)
Mexican Maya
Marine
3,375
kbpd
2,525
kbpd
PADD III
Demand
8,150
kbpd
PADDV
Demand
Light/Sweet
Heavy/Sour
Light/Sweet
Heavy/Sour
Heavy/Sour
Light/Sweet
PADD II
Demand
TX Gulf Coast
Refiners
Pacific Northwest
Refiners
California
Refiners
Midwest
Refiners
Rail
Pipeline
Clearbrook, 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 OilTakeaway 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 CaseTakeaway (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
 NewWC 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 SupplyChain
This presentation is available at:
www.plgconsulting.com/categories/presentations
-
ThankYou !
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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