Crude: Resources, Regulations & Railcars Prepared for:

Transcription

1 Logistics Engineering Supply Chain Crude: Resources, Regulations & Railcars Prepared for: June 17, 2014

2 About PLG Consulting 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 Financial services Partial Client List 2

3 What is behind the North American energy revolution? Recoverable Resources & Enabling Technologies Resources N.A. shale plays Western Canadian oil sands Technologies examples Hydraulic fracturing Horizontal drilling Steam Assisted Gravity Drainage (SAGD) Continuous Improvement Evolving exploration and production technologies Tremendous productivity gains drives cost reductions Logistics infrastructure re-plumbing in progress Energy Revolution 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 3

4 Unconventional Energy Resources North America Shale Western Canada Oil Sands Source: CAPP, About Oil Sands, June 2013 Source: EIA, May 2014 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 4

5 Convergence of hydraulic fracturing and horizontal drilling in last five years Fracking first used in 1947 Revolutionary advances since 2009 Yields 3-10x the initial production rate of conventional wells US uniquely positioned for the techniques Private mineral rights Drilling intensity (wells per acre) 90% of rig fleet equipped for horizontal drilling Location of shale plays Shale Technology Introduction Rapid ROI for E&P companies Typical well earns back capital cost in 1-2 years Depending on play productivity, break even price of ~$65/bbl (WTI) for oil and $3.50/Mbtu for gas Liquid plays providing highest returns currently and a majority of drilling rigs are focused on liquids Oil / Gas rig count split at ~80% / 20% from ~20% / 80% five years ago Source: Baker Hughes GAS OIL THERMAL 5

6 New Fracking Techniques Drive Increased Production At Lower Costs 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 Source: Marathon, February 2014 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 Source: EIA Drilling Productivity Report, May

7 Oil Sands Production Processes 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 Mining Drilling - SAGD 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 Source: 7

8 Shale Supply Chain and Downstream Impacts Inputs Wellhead Direct Output Thermal Fuels Raw Materials Downstream Products Generation All Manufacturing Steel Proppants OCTG Chemicals Water Gas NGLs Home Heating (Propane) Other Fuels Process Feedstocks Feedstock (Ethane) Byproduct (Condensate) Fertilizer (Ammonia) Methanol Chemicals Petroleum Products Cement Crude Other Fuels Petro-chemicals Gasoline 2010 onward RAIL INDUSTRY DEMAND 2016 onward 8

9 U.S. Frac Sand Industry Trends Rapid growth and maturation of both industries (hydraulic fracturing and sand production) over the past 5 years Sand supply base growing and consolidating at the same time Mines continue to open; supply base is consolidating Large fluctuations in price of sand based on supply/demand balance Significant production growth beyond WI in IL and MO due to new demand for 100 mesh sand Unit train shipping is the game-changing logistics development spurring investment in larger load-out sand transload facilities Benchmark high-efficiency unit train example Illinois to South Texas Single-line haul (one rail carrier), private railcars achieving two round trips per month, origin sand facility has direct rail load-out and destination trucking is less than 100 miles Total Delivered Cost per Ton ~ $122 Destination Transload & Trucking 25% Rail - Freight, FSC and Eqp Lease 42% Sand 33% Logistics costs drive ~ 67% of total delivered sand cost Source: PLG analysis using BNSF public pricing does not include fixed assets at origin or destination, December

10 Shale Gas History and Future Demand Gas production has increased over past five years with a significantly lower gas rig count 1,000 rigs at peak down to ~300 rigs Drilling productivity continues to increase production per well and lower costs And the Liquids (Crude, NGL) wells produce dry natural gas as a by-product Abundant US gas recoverable reserves Low cost reserves in accessible locations near population Marcellus gas production is the eighth largest country already US will become a net gas exporter by 2020 US gas demand will grow due to: Coal-fired generation plant converting to gas More industrial use steel, fertilizer, methanol Mexican export via pipeline and LNG export overseas Increasing use as transportation fuel 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 Source: RBN Energy, January 2014 rigs 2,500 2,000 1,500 1, Rig Count with Natural Gas Production Gas Oil U.S. Natural Gas Production Source: Baker Hughes, EIA, PLG Analysis, June 2014 Bcf/d

11 Processing infrastructure being installed to handle increased NGL supply New facilities near shale plays Domestic ethane supplies to quadruple by 2025 Exports of NGLs will continue to grow Overabundance of NGLs Will Grow NGLs are building blocks in chemical supply chain US has shifted their petrochemical supply stream to >90% ethane-based to leverage supply/cost advantage Source: IHS Energy Source: IHS Chemical, September

12 Shale Gas Phased Impact To NA Industrial Renaissance Phase III Manufacturing : Raw material cost driven SHALE GAS BOOM Phase II - Downstream Products: Resins, Chemicals Phase I - Gas & Power-intensive Industries: Steel, Fertilizer, Methanol Phase I Industries using gas as primary feedstock have global cost competitiveness; new US factories being built >$100B of Chemical Expansion Announced Phase II Downstream products require significant processing facilities investment and lead time Phase III US material cost advantage will enable traditional manufacturing to return to the North America as about 65% of the cost of manufactured product is material cost Source: American Chemistry Council, February

13 The Re-Plumbing of Hydrocarbons in North America Shift from coastal to mid-continent supply points necessitated replumbing 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 Oil Sands Permian Bakken Eagle Ford Marcellus Source: EIA, PLG Analysis (Google Earth), April 2014 Infrastructure built rapidly to help facilitate new energy movements Source: Enbridge, April

14 Basic Facts About Crude Oil Grades and Qualities Heavy/sour Higher sulfur content, yield for asphalt & diesel Sources include Western Canada (largest single play in North America) Venezuela Mexico, Alaska North Slope Middle East (light/sour) Significant investments made ($48B since 2005) at select refineries to install coker units that will allow processing of heavy/sour Heavy/sour crude has a natural home in Midwest and US Gulf Coast (~2.8 MM bpd demand at USGC) Light/sweet Brent, WTI, and US shale play crudes (Bakken, Permian, Niobrara, Eagle Ford) are light/sweet US is close to saturation point on light/sweet crude at mid-continent and USGC refining areas Source: RBN Energy 14

15 ANS Light/Sweet Crude Logistics Rail Light/Sweet Pipeline Heavy/Sour Pacific Northwest Refiners Bakken Marine PADD V Demand 2,525 kbpd PADD II Demand 3,375 kbpd California Refiners Midwest Refiners 1,075 kbpd East Coast Refiners PADD I Demand Brent Sources: EIA, PLG analysis (Google Earth) Permian Eagle Ford TX Gulf Coast Refiners LA Gulf Coast Refiners 8,150 kbpd PADD III Demand Brent 15

16 Oil Sands Heavy/Sour Crude Logistics Rail Pipeline Light/Sweet Heavy/Sour Pacific Northwest Refiners Marine PADD V Demand 2,525 kbpd PADD II Demand 3,375 kbpd California Refiners Midwest Refiners LA Gulf Coast Refiners Sources: EIA, PLG analysis (Google Earth) TX Gulf Coast Refiners 8,150 kbpd PADD III Demand Mexican Maya 16

17 Refined Products Market Dynamics U.S. shifted to net exporter of refined products Mitigated 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 Outlet for increasing domestic crude oil which cannot be exported without being processed Source: Valero Investor Presentation, March 2014 Source: Valero Investor Presentation, March 2014 Source: Valero Investor Presentation, March

18 All oil sands pipelines are under intense scrutiny and subject to court challenges None of these developments will proceed at a pace that will match anticipated production levels Western Canada Crude Oil Pipelines Canadian Oil Producers adopting CBR as a risk mitigation measure to ensure access to markets in North America and offshore Main driver of crude by rail out of Western Canada will be delta between pipeline capacity and crude oil production Expect Keystone XL to be built but with more delays Likely Built at Some Point Trans Mountain Express (Kinder Morgan) Alberta Clipper (Enbridge) Keystone XL (TransCanada) Unlikely Northern Gateway (Enbridge) Energy East (TransCanada) 18

19 Large pipeline build to Texas Gulf Coast 1.45 MMb/d added in and 1.92 MMb/d to be added in Large pipeline projects from Cushing including Keystone Gulf Extension and Seaway pipelines Other pipeline projects from Permian, Eagle Ford, and Midwest US Crude Oil Pipelines Bakken pipeline export capacity Projected to increase to 715 kbpd in 2014 from only 280 kbpd in 2010 (NDPA, Jan. 14) Pipeline Capacity to Texas Gulf Coast 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 Source: RBN Energy, December

20 Carloads Handled Operating Onshore Rigs Correlation of Operating Rig Count with Sand and Crude Carloads Handled 250,000 2, ,000 Operating On Shore Rigs All Sand Carloads Petroleum Carloads 2, ,000 1, ,000 1,000 50, Avg Avg STCC (sand) and (petroleum) Source: US Rail Desktop, Baker Hughes, Surface Transportation Board, PLG Analysis, May

21 Carloads Shale Related Rail Traffic Still Small Relative to Coal Volumes Railcars Handled: Sand, Crude, & Coal 2,500,000 2,000,000 1,500,000 1,000, ,000 0 Sand Crude Coal Sand Crude Coal Quarterly Data STCC (sand), (petroleum), (coal) Source: US Rail Desktop, Surface Transportation Board, PLG Analysis, March

22 The Importance of Price Differentials to Crude by Rail Differentials made rail attractive Bakken and WTI differential as high as ~$20/bbl vs. Brent in 2012 CBR enables producers to sell at trading hubs with higher benchmarks Market response: E&P, midstream players willing to rapidly deploy significant capital to enable access and capitalize on spreads Multi-modal logistics hubs in shale plays and at destination markets (i.e. Cushing, OK, St. James, LA, Pt. Arthur, TX, Albany, NY, Bakersfield, CA) Lease and purchase of railcar fleets Refineries install unit train receiving capability Particularly coastal refineries previously captive to waterborne imports (i.e. Philadelphia, PA, St. John, NB, Washington state) Pipeline capacity underutilized Rail captures 73% Bakken takeaway by April 2013 Differentials are both an incentive and a risk for crude by rail 3Q 2013 a cautionary note Mbbl/d 1,200 1, Source: North Dakota Pipeline Authority, January 2014, PLG Analysis ND Crude Production and Rail Transport ND Production Crude by Rail Source: North Dakota Pipeline Authority, PLG Analysis, May

23 Crude by Rail Statistics Carloads/Quarter 300, ,000 * Bbls/Day 900, , , , , ,000 WTI-Brent equilibrium 3Q3013 3Q , , , ,000 50, , ,000 - Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Petroleum & Petroleum Products (carloads/quarter) Crude Originated (carloads/quarter) Williston Crude by Rail (bbls/day) 0 *2014-Q2 quarterly rate through May 24 Source: AAR, North Dakota Pipeline Association, Surface Transportation Board, PLG Analysis, May

24 Shale Development and Crude By Rail: Current Market Dynamics Adverse 3Q 2013 market forces have reversed WTI-Brent spread now ~$5.50/bbl Brent vs. WTI Spread ($/bbl) CBR rebound driven by Bakken to coasts Weak long-term outlook for Bakken CBR to USGC Key driver: LLS now aligned with WTI, not Brent Next wave of CBR development: Canadian Oil Sands Terminal investments in Alberta and PADD II and III Over 1,300 kbbl/day planned AB loading capacity through 2015 NOT like the Bakken more challenges Complexities of heavy/sour product handling (steaming, diluent, unit train challenges) Fewer destinations Existing and growing mode competition to logical markets (pipelines and barge) Tank car market reorienting to coiled/insulated car types (~2/3 of CBR fleet order backlog) Source: RBN Energy, May 2014 Crude Oil Differentials ($/bbl) Source: EIA, May

25 Announced Crude Rail Terminals Through load terminals Largest and most efficient in Bakken 69 unload terminals Majority on the Coasts and Mississippi River 25

26 Bakken and Oil Sands Crude Oil Takeaway Forecast 7,000 Base Case Takeaway (kbpd) 6,000 5,000 4,000 3,000 Pipeline Crude by Rail Local Refining 2,000 1, Source: 26

27 High Profile Accidents Changing Crude by Rail Rail industry has a strong safety record, but optics of CBR accidents are overwhelming any positive statistics Industry, government, media focus on tank car design Railroad operating practices, maintenance equally important 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 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 27

28 Bakken Crude Volatility 28

29 Possibility of Lifting Crude Oil Export Ban U.S. energy officials considering easing federal laws that prohibit exports of most crude Rising production of light oil / condensate that is not wellmatched 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 Landlocked crude prices (ie WTI and Bakken) would most likely rise higher closer to international prices Export of Canadian crude via the U.S. would be simpler without the complication of keeping U.S. diluent separate from Canadian crude 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 Source: RBN Energy, May

30 Logistics Engineering Supply Chain This presentation is available at: Thank You! For follow up questions and information, please contact: Taylor Robinson, President +1 (508) / trobinson@plgconsulting.com -