North American Crude By Rail Challenges and Growth Analysis

Transcription

1 Logistics Engineering Supply Chain North American Crude By Rail Challenges and Growth Analysis Prepared for: Indianapolis, IN September 11,

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 Institutional investors Partial Client List 2

3 PLG s Crude By Rail Industry Qualifications Deep rail industry experience Operational Commercial Design & engineering Equipment market Broad CBR industry client experience over past 3 years E&P companies Refiners Terminal developers Investors private equity, hedge funds, investment banks Government agencies, industry advocacy groups Equipment leasing Diverse projects CBR supply chain optimization Rail commercial negotiations Rail car acquisition commercial & technical inspection Comprehensive design & engineering rail, marine, tankage, product handling, and related facilities EH&S training Investment advising Industry s only long term, CBR volume forecast with complimentary rail tank car forecast Recognized industry thought leader on CBR and tank car markets Numerous industry presentations, articles and advising 3

4 Unconventional Energy Resources US Shale (and Canadian) Western Canadian (WC) Oil Sands Source: EIA, May 2014 Innovative, new E&P technologies developed by smaller entities has allowed additional hydrocarbon production in new locations; each well <$10MM Mass production methodologies developed to lower costs Challenges -> product variability and volatility Source: CAPP, About Oil Sands, June 2013 Multi-billion dollar capital investments required by a limited number of players to set up production infrastructure Open surface mining shifting to SAGD process will harvest more bitumen over long term Challenges -> distance to markets and diluent 4

5 Alaska Production Oil Sands N.A. Crude Logistics Flow Before 2010 PADD V Refineries California Production PADD II Refineries PADD I Refineries Waterborne Imports Waterborne Imports Permian Vertical Drilling PADD III Refineries PADD III to PADD II Coastal refineries mainly supplied by waterborne imports Mid-Continent supplied from Gulf Waterborne Imports Gulf of Mexico Production 5

6 Alaska Production Oil Sands N.A. Crude Logistics Flow Bakken PADD V Refineries California Production PADD II Refineries PADD I Refineries Waterborne Imports Waterborne Imports Re-plumbing in process Pipelines are reversing, repurposing and being built CBR is a flexible, rolling pipeline with multiple destinations Permian Eagle Ford PADD III Refineries PADD III to PADD II Waterborne Imports Gulf of Mexico Production 6

7 Shale Oil Challenges Variability & Volatility Shale oil is either light crude or condensate with wide variation within and between plays Issues caused by variability include: Two supply streams with additional logistics methods are sometimes necessary Heavy discounting of condensate and very light oil as it is much less desirable to the refineries and export volume has been limited so far Rapidly growing light crude oversupply in the US could cause a Day of Reckoning at some point (2015~2020?) Term coined by RBN and Turner, Mason & Co. US crude oil production volume growing from 8.5M b/d to 12M b/d (2014 to 2019) Including ~ 1.8M b/d of condensate (2019) Could cause $15-20/bbl LLS discount vs. Brent Source: RBN Energy Shale Development: The Evolving Transportation Impacts 7

8 High Profile Accidents Changing Crude by Rail Rail industry has a strong safety record, but optics of CBR accidents in past ~year overwhelm 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 DOT NPRM released July day comment period through end of September Expect final ruling by early 2015 Example only 8

9 U.S. DOT NPRM Potential Impact On CBR Growth Classification $ characterization of mined gases and liquids (minimal) Was expected; most parties have already taken steps to tighten process Rail routing risk assessment (minimal) Class 1 s had already agreed to do this voluntarily Given limited options in some cases will not have significant impact to actual routings Reduced operating speeds (minimal ~ large negative) 40 mph speed restriction for HHFT trains with any cars not meeting enhanced standard in: High threat urban areas OR Areas of > 100k population OR all areas If areas of >100k population or all areas is selected this could have negative impact Enhanced braking (minimal ~ large negative) If ECP braking system is required it would require large investments and modifications Three tank car options announced for HHFT trains (minimal ~ large negative) PHMSA and FRA Designed Tank Car, AAR 2014 Tank Car, Enhanced CPC 1232 Tank Car 2 with shell thicknesses of 9/16 NPRM expects existing 7/16 shells will meet new standard (9/16 ) by adding an additional 1/8 thickness to the retrofitted jacket (no grandfathering in mentioned in NPRM) Uncertainty on how many cars can actually have this performed and to what extent tank car owners will want to retrofit Insulation Head Shield Top Fittings Housing Tank Shell Tank Head Tank Car Manway Bottom Outlet Valve/Protection Skid Tank Jacket Source: API with PLG simplification 9

10 Carloads/Quarter 120,000 US Crude By Rail 2014 Growth Analysis Bakken Bbls/Day 1,000, , ,000 US Crude Originated (carloads/quarter) 80,000 60,000 40, , ,000 Bakken Crude by Rail (bbls/day) 20,000 - Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Railroad performance related to severe winter and large grain harvest Slowing of crude production during severe winter WTI-Brent equilibrium 3Q3013 Bakken CBR lower in 2014 than predicted due to: 200,000 - Source: NDPA, STB, PLG Analysis, September 2014 Decrease in CBR shipments to USGC due to pipeline expansion Delays in offloading terminals in PNW and CA caused by environmental and permit issues 10

11 Western Canada 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: 11

12 Western Canada Crude Oil Pipelines Current pipelines are at capacity with higher apportionment due to maintenance and expansion Oil Sands pipelines are under intense scrutiny and subject to court challenges and protests in US and Canada NEB is extending its review of Trans Mountain expansion by 7 months Recent Canadian Supreme Court ruling gives more power to First Nations in land claims Innovation with existing pipelines increasing capacity Enbridge will temporarily switch the flows of Alberta Clipper and Line 3 on 17.5-mile segment across the US- Canadian border Will maximize the flows under existing permits until the Department of State review is completed on expansion Increases Alberta Clipper flows by 27% to 570 kbpd by end of September and potentially up to 800 kbpd in 2015 Large Canadian oil producers and pipeline companies are strategically investing in CBR as a flexible option to pipelines for the short and long term Source: CAPP, June 2013 Likely Built Within Medium Term (~2019) Trans Mountain Express (Kinder Morgan) Alberta Clipper (Enbridge) Keystone XL (TransCanada) Likely Delayed Until 2020 or Later Northern Gateway (Enbridge) Energy East (TransCanada) 12

13 Distance Challenge - Western Canada to US Gulf Coast Western Canadian oil is landlocked and competes with global waterborne crude supplies with much lower transportation costs US Gulf Coast is natural home for western Canadian heavy crude Up to 300 miles of feeder pipeline to rail/pipe terminals Over 2,100 more miles on either pipeline or rail to US Gulf Coast Long term committed pipeline has significant cost advantage vs rail shipments of dilbit (reducing diluent amount increases rail competitiveness) Hardisty to US Gulf Coast Source: Keystone XL EIS, PLG Analysis Pipeline Long Pipeline Dilbit Term Committed Uncommitted Unit train Dilbit Manifest Miles 2,125 2,125 2,475 2,475 Transit time for crude (days) Total Cost ($/bitumen bbl) $18 $25 $25 $29 13

14 Bitumen and diluent definitions Diluent Challenge (and Possible Solution?) Bitumen - heavy, viscous oil that must be processed extensively to convert it into a crude oil before it can be used by refineries to produce gasoline and other petroleum products Diluent - lighter viscosity petroleum products that are used to dilute bitumen for transportation in pipelines Dilbit bitumen blended with ~ 30% diluent; allows for crude to flow and meet pipeline specs Railbit bitumen blended with ~17% diluent; allows for crude to be transported by rail using coiled and insulated tank cars Purebit or Neatbit raw bitumen with little to no diluent; special steaming equipment is needed at loading and offloading terminals to transport in coiled and insulated tank cars Diluent Recovery Unit (DRU) Removes diluent from crude blend at the terminal before it is loaded onto railcar Diluent returned to field to be reused MEG Energy is planning on building a $75 M DRU as part of a 250 mile pipeline system from its Christina Lake project to Canexus, with completion targeted for late 2015 Several other parties/facilities are investigating units; total cost benefit still not fully evident Challenge at unloading facility if it is NOT the refinery bitumen needs to flow via pipeline again Diluent penalty Additional freight cost (rail cost from WC to USGC) 30% diluent vs 17% diluent: freight costs on 1.43 bbls vs bbls for each bbl of freight costs = $5.60/ bbl of bitumen Geographical difference in value of diluent Higher value of diluent in WC vs the value you ll receive with it blended in bitumen in US Gulf Coast Source: CN 14

15 Canadian Crude By Rail 2014 Growth Analysis Bbls/day Canadian Crude Oil Exports by Rail 180, , ,000 Canadian Crude Oil Exports by Rail (bbl per day) 120, ,000 80,000 60,000 40,000 20,000 - Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Canadian CBR lower in Q then predicted Shutdown of Canexus Bruderhiem loading terminal due to pipeline issues was largest loading terminal in WC Delays in opening of other unit train loading terminals in western Canada Source: National Energy Board (Canada), September 2014 Tighter differentials between Canadian and US landed import heavy crude prices Over 100k b/d of crude is also moved within Canada 15

16 Bakken and WC 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: 16

17 N.A. Crude By Rail Future Drivers Tailwinds Headwinds New WC pipelines will likely be delayed beyond announced dates Increasing Bakken & Oil Sands production Additional imports still to be displaced in US east, west, USGC More terminals coming online US crude export ban easing (condensate first)? West coast export potential for WC bitumen via rail? Oversupply of light crude in the US 2014~2015 -> Day of Reckoning Environmental hurdles 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) 17

18 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