Frac Sand New Volumes. Presented by. Taylor Robinson, President PLG Consulting

Transcription

1 Frac Sand New Volumes Presented by Taylor Robinson, President PLG Consulting June 26,

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 has shifted towards more natural sand overall sometimes 100% 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 cost-efficient 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 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 Nearly all new techniques drive more sand usage! 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 Source: Whiting Petroleum, December Investor presentation 5

6 Frac Sand Deposit Locations Most desired sand comes from WI, MN, IL MO has momentum More interest in OK 6

7 Major Sand Shipping Flows 7

8 91 operational frac sand mines 15 in development 15 permitted 16 proposed 5 stalled 3 inactive Sand Mining and Processing - Wisconsin Trempealeau County moratorium on new facilities effective August 30, 2013 Most active WI county relative to frac sand permits 26 companies As of 5/1/14 Moratorium in effect for up to one year, pending environmental and ethics investigations State continues to be a legal, environmental and quality of life battleground Trempealeau County Area Source: as of May 1,

9 Sand Mining and Processing - Minnesota State has launched a multi-agency, cohesive management approach, including 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 Have had growing pains in establishing common data and ability to react to constituency requests Map notation regarding lack of previously displayed location data is example Winona, MN PCA data request is three months overdue Earlier this week, MN Court of Appeals upheld decision to not require an environmental impact statement for Winona County project, creating precedent for similar disputes High Activity Area for Active & Proposed Frac Sand Mining, Processing and Transloading (*) 9

10 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 10

11 Missouri has an existing sand industry frac sand is a natural evolution Missouri - Up and Coming Missouri has geographic advantage and potentially logistics advantage vs. other Northern White locations Some facilities have access to multiple Class I rail carriers Barge access is plentiful to the Northern White sand mines in SE Missouri 11

12 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 12

13 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 13

14 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 16% Increased freight rate (13% 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 ~ $126 Rail - Freight, FSC and Eqp Lease, 38% Destination Transload & Trucking, 25% Sand, 36% Logistics costs drive ~ 63% of total delivered sand cost Source: PLG analysis using BNSF public pricing does not include fixed assets at origin or destination 14

15 Sand Railcar Market Conditions Small Covered Hoppers Current market described as high demand, red hot, very tight by leasing companies Increased frac sand per well demand, surging liquids production Additional sand sources opening in Wisconsin New orders from cement shippers Best availability is generally well into 2015 Typical full service lease rates $600 - $650 Frac sand shippers/receivers will continue to move towards more efficient methods of rail transportation Manifest shipments require 2X the number of railcars vs. unit trains due to increased cycle times Use of manifest service usually encourages use of railcar as storage at destination, further increasing fleet requirements Cement consumption is expected to grow by 6.4% in 2014 and 6.2% in 2015, encouraging railcar orders 15

16 End Market Drivers Will Also Influence Growth Curve of Industry Upside demand levers Domestic crude will continue to displace imports due to competitive and profitable delivered cost of tight light oil (from shale) Global oil prices likely stay relatively high Increase demand for natural gas higher prices eventually Continued switch to natural gas from coal for electricity generation Downside demand levers Crash in crude oil prices Government intervention and/or more regulations Global recession Fracking technology that displaces sand as a proppant??? Dry gas exports to Mexico LNG exports CNG/LNG for transportation markets 16

17 #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 17

18 #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 18

19 What Will the Frac Sand 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! 19

20 Thank You! This presentation is available at: categories/presentations For follow up questions and information, please contact: Taylor Robinson, President +1 (508) / trobinson@plgconsulting.com 20