Logistics Engineering Supply Chain. State of the Proppants Market. Prepared for. Presented by Taylor Robinson, President, PLG Consulting

Transcription

1 Logistics Engineering Supply Chain State of the Proppants Market Prepared for Presented by Taylor Robinson, President, PLG Consulting March 12, 2014 Houston, TX 1

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 Private Equity Partial Client List 2

3 Proppants High Level Overview Common fracking industry rule of thumb has been: 80% / 10% / 10% (Natural Sand, Ceramics, Resin Coated) volume usage Everybody has their secret recipe that is different for each play Ratio today has shifted towards more natural sand overall Demand Natural sand rising significantly due to new stimulation techniques Ceramic and resin coated volumes are flat to down Natural sand is ~10% of ceramic proppant cost and can be delivered in costefficient unit train service Supply New natural sand mines continue to come on line, trans-loading is adequate New capacity for ceramics coming PyraMax (Imerys) opening in Wrens, GA Trends Ceramics needed for high pressure drilling deep shale and dry gas Gas rigs still <300, not expected to rise significantly in near future 3

4 Frac Sand Supply Chain Definition and Industry Trends Mining Processing Rail Load-out Long Haul Rail Transloading and Storage Trucking to Well Rapid growth and maturation of hydraulic fracturing and frac sand industries simultaneously Consolidation of responsibilities out-sourced or in-sourced Demand has fluctuated but strong upward trend Sand supply growing while consolidating number of players Unit train shipping is the game-changing logistics development Trucking market remains regional and disaggregated 4

5 Frac Sand Deposit Locations Most desired sand comes from WI, MN, IL MO has momentum More interest in OK 5

6 Major Sand Shipping Flows 6

7 Sand Mining and Processing - Wisconsin 72 operational frac sand mines 20 in development 13 permitted 17 proposed Trempealeau County moratorium on new facilities effective August 30, 2013 Most active WI county relative to frac sand permits 26 companies 4,733 acres Moratorium in effect for up to one year, pending environmental and ethics investigations As of 5/1 Trempealeau County Area Source: as of May 1,

8 Sand Mining and Processing - Minnesota 20 active frac sand mining, processing and transloading facilities Over 20 facilities in the planning stages State has launched multi-agency website (silicasand.mn.gov) to provide a single source of information regarding rules and activities involving the mining, transportation and processing of silica sand Environmental Quality Board (EQB) Minnesota Department of Natural Resources (DNR) Pollution Control Agency (PCA) Department of Health Department of Transportation Department of Agriculture Rule- Making Authority Source: 8

9 Sand Mining and Processing - Illinois Major facilities for key players (U.S. Silica, Santrol/Fairmount, Unimin) and increasing number of mid-tier and new sand companies Key players are expanding existing facilities and acquiring new sites Well-positioned to provide high-quality Northern White product at a lower delivered cost per ton vs. WI/MN sand to Eagle Ford Permian Marcellus/Utica To-date support from state government leaders for expansion and new development projects Source: Increasing environmental protests from citizen groups 9

10 Hydraulic Fracturing Materials Inputs and Logistics Involved Materials Source to Transloading Transloading to Wellhead Site Waste Water Frac Sand 40 ~ ~ 280 ~500 Total Truckloads OCTG (Pipe) 5 20 Chemicals 2 8 Clean Water/ Cement Local source ~1,000 Oil/Gas/NGLs ~1,200 Total Truckloads Truck, Rail, Pipeline 10

11 Carloads Frac Sand Handled by Railroads 60,000 50,000 Western carriers are geographically advantaged 40,000 30,000 20,000 10,000 UP BNSF NS CN CSXT CPRS KCS 0 Quarterly Data STCC Source: US Rail Desktop 11

12 Processed Sand Total Delivered Cost per Ton Benchmark unit train example Illinois to South Texas Single-line haul (one rail carrier) Private railcars Railcar fleet achieving two round trips per month Origin sand facility has direct rail load-out Destination trucking is less than 100 miles Unit train operations include efficient origin/destination handling hours per train Manifest service would increase rail-related costs by 17% Increased freight rate (14% higher) Railcar fleet only achieves one turn per month, on average Additional trackage required to accommodate larger fleet Delivery patterns are more variable, requiring additional destination storage and inventory Total Delivered Cost per Ton ~ $122 Rail - Freight, FSC and Eqp Lease, 42% Destination Transload & Trucking, 25% Logistics costs drive ~ 67% of total delivered sand cost Sand, 33% Source: PLG analysis using BNSF public pricing does not include fixed assets at origin or destination 12

13 End Market Drivers Will Also Influence Growth Curve of Industry Upside demand levers Domestic crude will continue to displace imports Global oil prices stay relatively high Increase demand for natural gas Continued switch to natural gas from coal for electricity generation Dry gas exports to Mexico LNG exports Downside demand levers Crash in crude oil prices Government intervention and/or more regulations Global recession Fracking technology that displaces sand as a proppant CNG/LNG for transportation markets Longer term US natural gas price increases 13

14 #1 Key to Winning Most Efficient Supply Chain Mining Processing Rail Load-out Long Haul Rail Transloading and Storage Trucking to Well Never shut down a well supply availability of quality product remains given Total cost down the hole by the end customer will become more precise and accurate Logistics cost is the highest portion of total delivered cost best freight and handling cost structure Hidden or soft costs at the customer will also drive sourcing decisions Winners will turn the supply chain into a conveyor belt smooth, predictable, synchronized Find ways to tighten relationship with customers schedule synchronization Utilize supply chain technology to further improve their performance and increase efficiency Invest in strengthening supply chain teams Cash flow will move up the priority list for sand companies Inventory management will become important 14

15 #2 Key to Winning Leverage Will Drive Further Industry Consolidation Mining Processing Rail Load-out Long Haul Rail Transloading and Storage Trucking to Well End customers will continue to mix in-sourcing and outsourcing Early in-sourcing driven by supply assurance and controlling own destiny Can outsource beat the most efficient in-sourcing? Will the end customers consider sand to be core competency? End customers desire Storefronts can choose between Walmart and Target Allows them to focus on their core competencies Minimizes their inventory costs while maximizing their flexibility Best Tier 1 suppliers will win Leaders understand the total cost structure with trade-offs and leverage the whole supply chain 15

16 What Will the Proppants Industry Look Like in 3 to 5 Years? Frac sand leads with significant growth forecast New fracking techniques and faster well completion for liquids New gas demand will drive gas drilling growth down the road Resin coated sand and ceramics not expected to grow significantly Price inflation coming later in 2014 and 2015? Survival of the fittest supply chain the evolution will continue Tier 1 supply base will further consolidate smaller players The best niche players will thrive as 2 nd tier and in small plays Supply chain practices and technology flow in from other industries Continuous Improvement mindset required to win Heavy focus on cost reduction will continue Cost and margin will continue to be rationalized direct and soft Difficult to win without volume leverage Sand supply Unit trains High volume transload and storage capability Will continue to be an exciting industry for the foreseeable future! 16

17 Thank You! For follow up questions and information, please contact: Taylor Robinson, President / trobinson@plgconsulting.com This presentation is available at: 17