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A New Era for Energy: Supply & Refining Dynamics
A New Era for Energy: Supply & Refining Dynamics
2 © Oliver Wyman 2
Mill
ion
barr
els
per d
ay
US crude oil production by source 1990-2035
0
5
10
15
20
25
30
1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 Tr
illio
n cu
bic
feet
Coalbed methane Lower 48 offshore
Lower 48 onshore conventional
Tight gas
Shale gas
Alaska
Source: US Energy Information Administration (EIA); Oliver Wyman analysis!
US natural gas production by source 1990-2035
0
1
2
3
4
5
6
7
8
1990 1995 2000 2005 2010 2015 2020 2025 2030 2035
Alaska
Lower 48 offshore
Lower 48 onshore
New production sources are eclipsing traditional ones, reversing declines…
…And natural gas production is growing, despite plunging spot prices.
US oil & gas production has gone from decline to growth, due to the maturing of technologies in unconventional fields.
1/08-7/12 6% CAGR
1/08-7/12 4% CAGR
3 © Oliver Wyman 3 Source: Crude Oil (Forecast, Market & Pipelines), Canadian Association of Petroleum Producers, June 2012; Oliver Wyman analysis!
In addition, Western Canadian oil production could double over the next two decades, driven by oil sands development.
North America has the potential to become oil & gas self-sufficient –and perhaps even a net exporter.
Western Canada oil sands & conventional supply 000 barrels per day
4 © Oliver Wyman 4
0
2
4
6
8
10
12
14
16
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
$/ M
MB
tu
Natural gas spot prices 1/2005-11/2012 (weekly data)
WTI
Brent
0
20
40
60
80
100
120
140
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
$/ B
arre
l
Crude oil spot prices 1/2009-11/2012 (weekly data)
Traditional energy pricing patterns and linkages have broken.
Current spread $22 (11/12)
Source: US Energy Information Administration (EIA); Oliver Wyman analysis!
Henry Hub
Domestic oil price spreads are driven by the difficulty of getting mid-continent crude to coastal end markets.
Low gas prices result from plentiful supply and flat demand with a lack of access to export markets.
5 © Oliver Wyman 5
0%
20%
40%
60%
80%
100%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Shar
e of
US
Elec
tric
ity G
ener
atio
n
US electricity generation by fuel 2004-2013E
Low natural gas prices and regulatory pressure on coal are driving a switch in electricity generation fuels.
0
5
10
15
20
25
30
35
40
2011-2015 2016-2020 2021-2025 2026-2030 2031-2035
US electricity generation capacity additions by fuel, 2011-2035E
Gig
awat
ts
Source: US Energy Information Administration (EIA); Oliver Wyman analysis!
Domestic natural gas prices are projected to remain low in the future, which will influence future generation capacity investment decisions.
Coal
Natural Gas
Nuclear
Renewables/Other Natural
Gas
Renewables/Other
Nuclear Coal
6 © Oliver Wyman 6
Changing oil & gas production patterns are driving new transportation needs.
• Mid-continent producers are struggling to find transportation outlets for their crude.
• Pricing spreads are likely to drive coastal refiners to favor onshore crude vs. imports, if the need for expanded transport infrastructure can be economically met.
• Potential growth in petroleum product exports New/expanding
crude oil flows New/expanding petroleum product flows
Major refinery centers
Source: Crude Oil (Forecast, Market & Pipelines), Canadian Association of Petroleum Producers, June 2012; Energy Information Administration; Oliver Wyman analysis!
Williston Basin/
Bakken Shale
Eagle Ford Shale
Niobrara Shale
Canadian Oil Sands
What Will be the Impact on the Rail Industry?
8 © Oliver Wyman 8
A lack of pipeline infrastructure capacity will present short- and long-term opportunities for rail.
Rail opportunities
• Short term: Capacity for Midwest/Gulf Coast while pipeline proposals clear regulatory review; longer term incremental capacity
• Short/ medium & long term: Capacity for East and West Coasts to support domestic and export demand in the absence of material pipeline development
Source: Crude Oil (Forecast, Market & Pipelines), Canadian Association of Petroleum Producers, June 2012; Pipelines, Power & Utilities Energy Producers, transportation- Railroads, TD Securities, October 5 2012; Oliver Wyman analysis!
Pipeline capacity additions will likely address Gulf Coast refineries’ need to replace crude imports
Price spread will increase East Coast refinery demand for Bakken/W. Canada
Refineries will pull from Bakken/ W. Canada as Alaskan production declines
Regional refining crude usage (current)
7.5M BPD
North American crude
Other crude imports
1.1M BPD 2.3M BPD
9 © Oliver Wyman 9
• 1,000 miles of rail line, 8 originating terminals in Williston basin
• Serves 30% of US refineries; has ~80% of crude–on-rail market
• Leasing 1,000 railcars to transport Bakken crude to refineries
• Plans to move 45K bpd to East, West and Gulf Coasts, and Canada
• Buying 2,000 railcars to move discounted crude from onshore basins to mid-continent refineries
• Developing ~80K bpd unit-train facility and related pipeline infrastructure to move crude from Bakken to Philadelphia
Sample rail infrastructure investments
Source: Financial Times, Professional Logistics Group; Pipelines, Power & Utilities Energy Producers, transportation- Railroads, TD Securities, October 5 2012; Oliver Wyman analysis Note: CN’s crude by rail volumes are currently tracking at an annualized rate of 40,000 carloads
2011 2012 CN 5,000 40,000*
CP 13,000 30,000-35,000
UP 25,000 >100,000
“Pipeline on wheels”
Change in rail-hauled crude carloads
Rail hauled crude: Number of Class I carloads (000s)
Producers are increasingly using rail for crude oil transport, driving railroad/third party infrastructure investment…
10 © Oliver Wyman 10
…But even after accounting for potential changes in coal haulage, further targeted investments will be required for rail to play long term.
Source: Association of American Railroads, “National Rail Freight Infrastructure Capacity and Investment Study,” September 2007; Oliver Wyman analysis!
Projected 2040 rail corridor volumes (without investment)
Below Capacity
Near Capacity
At Capacity Above Capacity
Investments to alleviate severe bottleneck
between mid-continent and Gulf Coast
Targeted investments to
connect to export facilities and refineries
Investments to connect busy mid-continent
network to East Coast refineries
11 © Oliver Wyman 11
Expanding oil & gas production will generate new opportunities for rail equipment manufacturers and infrastructure suppliers as well.
• Each well needs 47 railcars of material input for production, 40 of which are proppants
• Proppant car market has matured, with much smaller backlogs today
Sand cars
• Railroads are building capacity to transport from local pipeline terminals in remote oil/gas fields to refineries, terminals
• Increasingly, coastal refinery hubs are building new rail terminals to expand capacity
Terminals and customer facilities
• Bakken/oil sands growth generating tank car demand, ~12-15 month backlog
• New design requirements from AAR • Major purchases by oil majors and midstream
players • Extremely tight market, with high lease rates
Tank cars
Source: Professional Logistics Group, Railway Age, Bloomberg Businessweek; Oliver Wyman analysis.!
12 © Oliver Wyman 12
Continuing low natural gas prices could potentially revitalize North American chemical industries…
Impact on US petrochemical production % change in production volume, 2007-2016
-20%
-15%
-10%
-5%
0%
5%
10%
15%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: American Chemistry Council, Hydrocarbon Processing; US Energy Information Administration (EIA); INGAA Foundation Forecasts; Oliver Wyman analysis!
Average annual natural gas prices Henry Hub (2010$/MMBtu) to 2035
…And lead to additional movements of feedstock for rail.
13 © Oliver Wyman 13
There is a risk that low natural gas prices could drive cost-competitive alternatives to diesel…
Source: American Chemistry Council, Hydrocarbon Processing; US Energy Information Administration (EIA); AltFuelTrucks.com; US Department of Energy; Oliver Wyman analysis!
• OEMs now offering trucks that run on natural gas
• Fuel system conversion companies now offering aftermarket conversion for a broad mix of light, medium, and heavy duty trucks
• Companies such as UPS & Walmart testing
Natural gas (CNG/LNG) trucks
• Distribution infrastructure is being built out to support the trucking industry’s conversion to natural gas: Shell/ TCA: 200 fueling lanes Clean Energy/ Flying J: 150 fueling
stations
Planned natural gas pumps/stations
…Potentially changing the competitive dynamic between rail and trucking.
14 © Oliver Wyman 14
Upstream oil and gas
changes
Downstream oil and gas
changes
Opportunities Risks
In summary, a changing oil & gas industry is likely to present new growth opportunities for rail, provided risks can be managed.
• Growing need for ancillary transportation for shale supplies and production
• Growing need for crude transportation to East and West Coast refineries
• Established rail infrastructure and ease of rapid capacity increase
• Faster than expected depletion rates of onshore oil reserves
• Stricter regulation of fracking and oil sand production
• Additional pipeline capacity that could displace rail transportation
• Rolling stock asset scarcity • Stricter regulation of rail haulage • Rail transportation volatility
• Growing need for petroleum products transportation from mid-continent refineries to the East Coast
• Growing need for petrochemicals transportation
• Continued natural gas displacement of coal in electricity generation
• Potential natural gas displacement of diesel in trucking
