Post on 14-Jul-2015
transcript
Logistics Engineering Supply Chain
The North American Energy Revolution:
Implications for Rail
Prepared for:
The Rail Summit –The Supply Chain
Graham Brisben, CEO, PLG Consulting
Taylor Robinson, President, PLG Consulting
April 30, 2015
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Experience
Delivering value to over
200 clients since 2001
Real-world, industry
veterans
Logistics, engineering &
supply chain experts with
operational experience
Core Expertise
Bulk Logistics
Freight Rail
Energy & Chemical
Markets
Investment Advisory and
Corporate Development
Partial Client List
Services
Diagnostic assessments &
optimization
Logistics Infrastructure
design
Supply chain design &
operational improvement
Investment strategy, target
identification, due diligence,
post-transactional support
Crude by rail (CBR) and rail
tank car (RTC) forecasts
Independent technology
assessment &
implementation
Hazmat training, auditing &
risk assessment
About PLG Consulting
3
Deep rail industry experience Operational
Commercial
Design & engineering
Equipment market
Broad energy industry client experience over past five years
E&P companies
Oilfield services
Refiners
Terminal developers/midstream
Investors – private equity, hedge funds, investment banks
Government agencies, industry trade groups
Equipment manufacturing & leasing
Diverse projects Frac sand supply chain design &
implementation
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
PLG’s Oil & Gas Industry Qualifications
The North American Energy Revolution: Implications for Rail
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ssSource: CAPP, About Oil Sands
Source: EIA, May 2014
US Shale
Unconventional Energy Resources and Extraction Technologies
The North American Energy Revolution: Implications for Rail
Western Canadian (WC)
Oil Sands
Source: www.epmag.com
SAGD
Horizontal Drilling & Hydraulic Fracturing
Source: Marathon, February 2014
“Moore’s Law” at play: Exponential
advances in technology, resulting in
Declining costs
Surging production
Representative Producer Gains, Eagle Ford
Source: RBN Energy, December 2014
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New extraction technologies resulting in record production of gas, natural gas liquids (NGL), and crude oil
Water-borne imports of crude being displaced by domestic production
North America on pace toward full “energy independence” by 2020
The North American Energy Revolution: Implications for Rail
Source: CAPP Report, June 2014 Source: RBN Energy, December 2014
The North American Energy Revolution
6
Shale Supply Chain and Downstream Impacts
The North American Energy Revolution: Implications for Rail
Feedstock (Ethane)
Byproduct (Condensate)
Home Heating (Propane)
Other Fuels
Other Fuels
Gasoline
Gas
NGLs
Crude
Proppants
OCTG
Chemicals
Water
Cement
Generation
Process Feedstocks
All Manufacturing
Steel
Fertilizer (Ammonia)
Methanol
Chemicals
Petroleum Products
Petro-chemicals
Inputs Wellhead Direct
Output Thermal Fuels Raw Materials
The next wave:Manufacturing renaissance in the US based on abundant, low cost
energy and feedstocks
Impacts to-date include: Dramatic reduction in crude imports, lower electricity costs, lower
gasoline prices, increased refined products exports
Downstream Products
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U.S. Crude Oil Production (kbpd)
Source: EIA, February 2015
U.S. crude oil production growth Crude oil production over 9 MMbpd, up from 5
MMbpd in 2008
Growth has come primarily from shale oil production of light crude
2015 production close to US record of 1970
Decrease in crude oil imports Shale crude has been pushing out light crude
imports
Heavy sour crude imports have been steady, with Canada growing to become the primary US supplier
North America now supplies 2/3 of the U.S. crude demand
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U.S. Crude Oil Imports (kbpd)
Source: EIA, February 2015
Historical U.S. Crude Oil Production and Imports
The North American Energy Revolution: Implications for Rail
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Source: RBN Energy, January 2015
WTI, Brent & Natural Gas 2014 and 2015
Citibank cut its crude price forecasts, saying West Texas Intermediate (WTI) could go as low as the $20 per barrel range before recovering to reach a new equilibrium.- Reuters (2/9/2015)
The market doesn’t understand just how quickly oil companies are scaling back their activities, and as a result, oil prices could rebound faster than many observers expect.- Continental Resources CEO Harold Hamm (Fuelfix, 1/28/2015)
• U.S. shale oil industry has now entered
uncharted territories in its brief history
• Natural Gas and NGL pricing has also
dropped dramatically in a similar
timeframe…due to oversupply and NGL
ties to oil prices
• Market experts have widely varied
opinions on what the rest of the year
holds for pricing - ~$10-$70 per barrel…
2014: Oversupply Has Caused Precipitous Price Declines
The North American Energy Revolution: Implications for Rail
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Producers have taken the following
measures:
• Slashed their CAPEX by 30-50%+ for 2015
• Stopped drilling exploratory wells; focus drilling
on known “sweet spots”
• Requesting suppliers for price reductions up to
30%
~55% decline in onshore operating rigs
Conversely, Canadian oil sands producers are
completing in-process projects as they already
have significant investments made
…Shale Oil Rigs Are Falling Quickly…
The North American Energy Revolution: Implications for Rail
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U.S. Land Oil Rigs
Source: Baker Hughes, April 2015
4/24/15 = 676 U.S. Land Oil Rigs
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…However, Crude Oil Production Will Continue at High Levels
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Lower 48 States (excl GOM) Crude Oil Production (MMBPD), Includes Lease Condensate
Source: EIA, February 2015 Source: CAPP, January 2015
Cost reduction focus and “sweet spot” drilling will continue to lower break even cost
Held by Production (HBP) lease clauses will help support production
Smaller, weaker players will fall while stronger producers will actually grow during downturn
Oil sands has a 20-50 year view on projects
R&D budgets cut; new greenfield projects delayed
SAGD wells have lower break even costs compared to shale wells
Current pricing is a short term issue from their perspective
The North American Energy Revolution: Implications for Rail
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Source: RBN Energy, February 2015
At $50/bbl oil, producers are mostly at or below breakeven
Producer Rates of Return by Play and Product(Before Cost Reductions)
The North American Energy Revolution: Implications for Rail
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Producer Rates of Return by Play and Product(After Cost Reductions)
The North American Energy Revolution: Implications for Rail
Source: RBN Energy, February 2015
Producers can be profitable at $50/bbl oil with cost reductions
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WTI (Cushing) Forecast Pricing ($/bbl)
Source: Turner Mason, February 2015
Crude oil prices forecasted to improve as supply contracts, global demand increases over several years
2015 will be very challenging
Return of $100/bbl. oil: don’t hold your breath
However, forecasted price levels for 2017 and beyond will sustain continued growth in production (and frac sand, CBR)
Crude Oil Price Forecast
The North American Energy Revolution: Implications for Rail
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NA Crude Logistics Today
Sources: EIA, PLG analysis (Google Earth)
Light/Sweet
Heavy/Sour
Pacific Northwest Refiners
California Refiners
2,525kbpd
PADD VDemand
Midwest Refiners
3,375kbpd
PADD II Demand
East Coast Refiners
PADD I Demand1,075kbpd
LA Gulf Coast Refiners
TX Gulf Coast Refiners
PADD III Demand8,150
kbpd
Eagle Ford
Permian
Bakken
Rail
Pipeline
Marine
Oil Sands
GOM
The North American Energy Revolution: Implications for Rail
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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 are key
• St. James, LA LLS hub becomes most attractive destination
• Coastal refineries begin rail 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)
Historical U.S. Crude-by-Rail Growth
The North American Energy Revolution: Implications for Rail
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U.S. Crude by Rail Volumes (kbpd)
Bakken CrudeOriginations
US CrudeOriginations
Source: NDPA, STB, PLG Analysis, April 2015
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Mbbl/d
U.S. Bakken Basin Crude Production and Rail Transport (kbpd)
Production
Crude by Rail
Source: NDPA, PLG Analysis, April 2015
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CBR share of production expected to remain stable due to the optionality it provides and the lack of pipeline options to the key
markets on West and East Coast
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Bakken Takeaway Forecast (kbpd)
Crude by Rail Forecast
Pipeline Forecast
Local Refinery Forecast
Note: Based on current ~$55-60 WTI priceremaining constant
Source: PLG Crude by Rail & Tank Car Forecast, Feb. 2015
Bakken Production and Takeaway Share
The North American Energy Revolution: Implications for Rail
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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 U.S. and Canada
NEB has extended 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 has temporarily switched the flows of Alberta Clipper and Line 3 on 17.5-mile segment across the U.S.-Canadian border; will maximize the flows under existing permits until the Department of State review is completed on expansion
Large Canadian oil producers and pipeline companies are strategically investing in CBR for short and long term flexibility
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)
Pipeline Build-out Remains Key Logistics Issue for Oil Sands
The North American Energy Revolution: Implications for Rail
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Western Canada Takeaway Forecast (kbpd)
CBR Forecast
Pipeline Forecast
Local Refinery Forecast
Note: Based on current $55-60 WTI priceremaining constant
Source: PLG Crude by Rail & Tank Car Forecast, Feb. 2015
Proportion of production handled by rail expected to ramp up through 2017 and then drop back as pipeline capacity starts to develop
Western Canada Production and Takeaway Share
The North American Energy Revolution: Implications for Rail
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Source: PLG Crude by
Rail & Tank Car
Forecast, Feb. 2015
• Bakken & Oil Sands are main drivers of CBR volumes, accounting for ~87% of NA movements in 2017• Other plays such as Niobrara and Permian are seeing increasing CBR activity but will be adequately served by
pipelines long-term
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North American Crude by Rail Volume Forecast (kbpd)
Bakken
Western Canada
Niobrara
Permian
North American CBR Forecast Overview
The North American Energy Revolution: Implications for Rail
Note: Based on current ~$55-60 WTI priceremaining constant
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NPRM (July 2014) addressed following key areas: Classification & characterization of mined gases and liquids
Rail routing risk assessment
Reduced operating speeds
Three tank car specification options announced for HHFT trains –Option 2 (9/16” tank, no enhanced braking) is likely the new standard
Recent accidents continue to put pressure on increasing tank car safety specs and railway operating practices
Canada and U.S. now require Class 3 flammable liquids trains (includes crude oil) to transit high populated areas at less than 40 MPH
Rail tank car market conditions New-build backlog is 20-24 months and most/all orders have “no
cancellation” clauses
New order active on "pause" until new car specification and rules announced in May
Current lease price ~$1,900 / month
Spot market rate is ~$1,000/month or lower, very soft market
Numerous crude oil sets are in storage, leading to improved operations and availability of power which had been in short supply
Rate of new tank car orders down significantly given oil price and regulatory uncertainty
Tank CarInsulation
Top Fittings Housing
Manway
Tank Jacket
Tank Shell
Tank Head
Head Shield
Source: API with PLG simplification
Bottom Outlet Valve/Protection Skid
Industry Awaiting U.S. DOT PHMSA Decision – May 2015
The North American Energy Revolution: Implications for Rail
21The North American Energy Revolution: Implications for Rail
CRUDE45,644
13%
ETHANOL26,920
7%
LPG20,683
6%
CHEMICAL158,424
43%
AG76,579
21%
OTHER36,595
10%
2015 CRUDE32,277
8%
ETHANOL26,795
6%
LPG21,571
5%
CHEMICAL168,269
40%
AG79,864
19%
OTHER40,566
9%
SUBJECT TO RETIREMENT, STORAGE, OR
RESTRICTED USE DUE TO
REGULATION54,055
13%
2019
Total Fleet:364,847 Total Fleet: 423,396
Total Tank Car Fleet Forecast by Market Under NPRM Option 2 and $55-$60/bbl Oil
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Feedstock (Ethane)
Byproduct (Condensate)
Home Heating (Propane)
Other Fuels
Other Fuels
Gasoline
Gas
NGLs
Crude
Proppants
OCTG
Chemicals
Water
Cement
Generation
Process Feedstocks
All Manufacturing
Steel
Fertilizer (Ammonia)
Methanol
Chemicals
Petroleum Products
Petro-chemicals
Inputs Wellhead Direct
Output Thermal Fuels Raw Materials
Downstream Products
Since 2010 2017 onward
Railcar Demand Changes From Shale Revolution
The North American Energy Revolution: Implications for Rail
23The North American Energy Revolution: Implications for Rail
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U.S. Land Oil Rigs
Sand
Crude
Correlation of Operating Rig Count With Sand & Crude Carloads Handled
Source: Baker Hughes, STB, April 2015; Note that Sand category includes other commodities beside frac sand
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Fracking technology changes drove 35% growth in frac sand rail movements in 2014
Nearly 100B lbs. in 2014
“High intensity” fracking is a major trend; up to 100 cars of sand per well
New demand for 100 mesh product; eastern MO emerged as a major new supply area
However, significant market contraction underway in 2015
“Wind down” taking place in shale plays with large fracking crew layoffs; expect volume decreases up to 40%
Inventories up, slower railcar velocities
Demand expected to flatten for next two years
Reflects pullback in new exploration and drilling; decline in onshore rig count
As with last contraction (2012), logistics becomes the main platform for competition
Increased mode shifts where possible (rail to barge)
Consolidation expected among producers, service providers
Frac Sand Demand
The North American Energy Revolution: Implications for Rail
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US Land Proppant Demand All Wells (billion lbs)
Source: PacWest ProppantIQ, December 2014
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Current market is one of “mixed signals” Significant activity in short-term subleasing and railcar storage
Some shifting of new-build delivery schedules
Minimal outright cancellations of car orders
New-build production schedules are full through mid-2016….for now
However, significant changes on the horizon! Q1 2015 small covered hopper car orders at 131 vs. 8,627 cars during Q4 2014
Q1 2014 orders were 11,500
Overriding attitude for 2016 production is “wait and see”
Cement consumption is expected to grow by 8%+ in 2015 Cement also utilizes small covered hoppers
May be build/lease opportunities for cement cars with frac sand downturn
Plastic pellet cars market growing and competes for small hopper build capacity (large covered hoppers)
Small Covered Hoppers – Market Update
The North American Energy Revolution: Implications for Rail
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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
30+ year supply at ~$4 mm/btu; cost of production decreasing
Supply will overwhelm demand as prices approach $5/
US government will likely limit LNG export to protect US from world gas market price
Low-cost gas and NGLs driving US industrial “renaissance”
Source: EIA, February 2015
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U.S. Natural Gas Production (Bcf/day)
Actual Forecast
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Natural Gas Price at Henry Hub ($/MMBTU)
Historical Futures
Source: EIA for historical and CME Group for futures as of Jan. 14, 2015
US Shale Gas Background and Future
The North American Energy Revolution: Implications for Rail
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Ethane and propane production growth with shale gas Raw NGLs (y-grade) are extracted creating dry gas and y-grade streams; dry gas primarily used as a fuel for heat and power
Y-grade is sent to a fractionator where it is made into “purity” NGLs – ethane, propane, butane, iso-butane, natural gasoline
Ethane and propane are the largest components of the y-grade and are therefore seeing large growth in the U.S.
U.S. infrastructure build-out continues to process the huge low cost production volume increase in ethane and propane
Source: OPIS, December 2014 & CME Group, December 2014
Gas Value Chain
Source: Bentek: North American NGLs 4Q2014
Shale Gas, NGLs, and Downstream Chemical Processing
The North American Energy Revolution: Implications for Rail
28The North American Energy Revolution: Implications for Rail
Ethylene and Propylene
Ammonia and Derivatives
Methanol
Polymers and Resins
Chlor-alkali
Other
Source: American Chemistry Council and PLG analysis
Over $135B of New Shale-Related CAPEX Investments Have Been Announced
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Abundant feedstock, structural cost advantages, and domestic market growth driving US petrochemical industry expansion
Rate of expansion growth will be slowed by Lack of EPC capacity
Shortage of craft labor resources in the U.S. Gulf Coast
Increasing regulatory hurdles and delays
Expansion peak will be dampened and overall build-out will take longer than announced schedules
U.S. chemical industry is entering a historic growth period with incredible growth opportunities and challenges
Source: ACC and PLG Analysis, December 2014
ACC Estimate
PLG Estimate
U.S. Chemical Industry Capital Investment: Incremental Due to Shale Gas
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US Ethane USWeighted
WE LowCost
AsiaNaphtha
USNaphtha
Dec. 2013
Dec. 2014
Source: Townsend Solutions, December 2014
Cash Cost US$/ton (Ethylene)
US Chemical Industry Build-Out
The North American Energy Revolution: Implications for Rail
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We are in the early innings of the North American energy revolution
Natural gas – the first shale “oversupply” example
Crude oil – new shale and maturation of Canadian oil sands
NGL – a valuable byproduct from natural gas and crude drilling
Downstream chemicals and manufacturing – coming soon!
Lower hydrocarbon pricing environment is mainly caused by oversupply
Pricing will speed up cost reduction throughout supply chain
Industry consolidation will ensure long term global competitiveness
Lower oil prices will dampen growth profile for frac sand and crude by rail volume in the short term
Tank car and small covered hopper market has shifted gears to “neutral” for now
Near-term (2015-2016) turbulence on the way to 10+ years of growth and industrial expansion
Net positive for rail industry; growth opportunities for wide variety of railcar types
Presentation Summary
The North American Energy Revolution: Implications for Rail
Logistics Engineering Supply Chain
Thank You !For follow up questions and information,
please contact:
Taylor Robinson, President+1 (508) 982-1319 / trobinson@plgconsulting.com
This presentation is available for download at:http://plgconsulting.com/category/presentations/