Plg union league railway supply group luncheon

Logistics Engineering Supply Chain

The North American Energy Revolution: Implications for Rail

Prepared for:

Railway Supply Group

Graham Brisben CEO, PLG Consulting

February 20, 2015

2

Boutique consulting firm with team members throughout North America

§  Established in 2001

§  Over 100 clients and 250 engagements

Practice Areas §  Logistics §  Engineering

§  Supply Chain

Consulting services §  Strategy & optimization

§  Logistics assets & infrastructure development §  Supply Chain design & operationalization

§  M&A/investments/private equity

Industry verticals §  Energy §  Bulk commodities

§  Freight rail

§  Institutional investors and private equity

About PLG Consulting


Partial Client List

3

Deep rail industry experience •  Operational

•  Commercial

•  Design & engineering

•  Equipment market

Broad shale development industry client experience over past four years

•  E&P companies

•  Refiners

•  Terminal developers

•  Investors – private equity, hedge funds, investment banks

•  Government agencies, industry trade groups

•  Equipment leasing

PLG’s Industry Qualifications

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


4

s s Source: CAPP, About Oil Sands

Source: EIA, May 2014

US Shale

Unconventional Energy Resources and Extraction Technologies


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

5

•  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


Source: CAPP Report, June 2014

Source: RBN Energy, December 2014

6

Correlation of Operating Rig Count With Sand & Crude Carloads Handled


0

200

400

600

800

1,000

1,200

1,400

1,600

0

50,000

100,000

150,000

200,000

250,000

Ope

rating

U.S. L

and Oil Rigs

Carloa

ds Han

dled

U.S. Land Oil Rigs

All Sand Carloads

Petroleum Carloads

7

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 receipt 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

0

200

400

600

800

1,000

1,200

2010

-‐Q1

2010

-‐Q2

2010

-‐Q3

2010

-‐Q4

2011-‐Q

1 20

11-‐Q

2 20

11-‐Q

3 20

11-‐Q

4 20

12-‐Q

1 20

12-‐Q

2 20

12-‐Q

3 20

12-‐Q

4 20

13-‐Q

1 20

13-‐Q

2 20

13-‐Q

3 20

13-‐Q

4 20

14-‐Q

1 20

14-‐Q

2 20

14-‐Q

3 20

14 Oct

2014

Nov

U.S. Crude by Rail Volumes (kbpd)

US Crude Originations Bakken Crude Originations

0

200

400

600

800

1,000

1,200

1,400

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

US Bakken Basin Crude Production and Rail Transport (kbpd)

Production Crude by Rail

Source: NDPA, PLG Analysis, February 2015


8

2014: Oversupply Has Caused Precipitous Price Declines

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, 2/09/2015)

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…


9

Source: Baker Hughes, February 2015

…Shale Oil Rigs Are Falling Quickly…

•  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%

0 200 400 600 800

1,000 1,200 1,400 1,600 1,800

U.S. Land Oil Rigs


•  Will continue to drill “held by production” wells to maintain land assets – but no production

•  Conversely, Canadian oil sands producers are completing in-‐process wells as they already have significant investments made

10

…However, Crude Oil Production Will Continue To Grow

0

1

2

3

4

5

6

7

8

9

Lower 48 States (excl GOM) Crude Oil Production (MMBPD), Includes Lease Condensate

Source: EIA, February 2015 Source: CAPP, January 2015

•  ~$50 WTI price is very challenging for all producers right now

•  Cost reduction focus and “sweet spot” drilling will continue to lower break even cost

•  Smaller, weaker players will fall while stronger producers will actually grow during downturn

•  Oil sands has a 20-‐50 year view on projects

•  Have also cut R&D budgets and delayed new greenfield projects

•  SAGD wells also has lower break even costs compared to shale wells

•  Current pricing is a short term issue from their perspective


11

Shale Supply Chain and Downstream Impacts

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

Impacts to-‐date include: Dramatic reduction in crude imports,

lower electricity costs, lower gasoline prices, increased refined products exports

The next wave: Manufacturing renaissance in the US based on abundant, low cost energy and feedstocks


12

Over $120B of New Shale-‐Related Manufacturing Investments Have Been Announced


Ethylene and Propylene

Ammonia and Derivatives

Methanol

Polymers and Resins

Chlor-‐alkali

Other Source: American Chemistry Council and PLG analysis

13

Small Covered Hoppers – Market Update

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

§  “Mixed signals” should be expected due to oil price volatility and continual revisions to 2015 well completion plans

Availability positions are showing some “cracks” §  A few late-‐2015 new-‐build slots are available

§  New-‐build production schedules are full through mid-‐2016….for now

§  Overriding attitude for 2016 production is “wait and see”

Typical full service lease rates are currently $650 -‐ $675, down from late Q3 2014 (was over $700)

Frac sand shippers/receivers will continue to move towards more efficient methods of rail transportation, especially with heightened pressure on frac sand delivered cost per ton

Cement consumption is expected to grow by 8%+ in 2015 §  Cement railcar lessees are carefully watching the market for lease opportunities

Plastic pellet cars are successfully competing for small hopper build capacity


14

Low Oil Price Case North American CBR Forecast Overview


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

-

100

200

300

400

500

600

700

800

900

2013 2014 2015 2016 2017 2018 2019

Scenario 3 WTI $52-64 & WCS $40-52 Crude by Rail Volumes

Bakken

Western Canada

Niobrara

Permian

15

Industry Awaiting U.S. DOT PHMSA Decision – May 2015

NPRM (July 2014) addressed following key areas: §  Classification & characterization of mined gases and liquids

§  Rail routing risk assessment

§  Reduced operating speeds

§  Enhanced braking

§  Three tank car 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 specifications

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” till new rules announced in May

§  Some orders for 9/16” cars already on order books

§  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 was in short supply

§  Industry in a holding pattern -‐ general sentiment is “wait and see”

Tank Car Insulation

Top Fittings Housing Manway

Tank Jacket

Tank Shell

Tank Head

Head Shield

Source: API with PLG simplification

Bottom Outlet Valve/Protection Skid


16

Total Tank Car Fleet Forecast Under NPRM Option 2 and ~$58/bbl Oil


CRUDE 45,644 13%

ETHANOL 26,920 7%

LPG 20,683 6%

CHEMICAL 158,424 43%

AG 76,579 21%

OTHER 36,595 10%

2015

CRUDE 32,277 8%

ETHANOL 26,795 6%

LPG 21,571 5%

CHEMICAL 168,269 40%

AG 79,864 19%

OTHER 40,566 10%

SURPLUS CRUDE 13,955 3%

SUBJECT TO RETIREMENT, STORAGE, OR

RESTRICTED USE DUE TO

REGULATION 40,100 9%

2019

Total Fleet:364,847 Total Fleet: 423,396

Logistics Engineering Supply Chain

Thank You ! For follow up questions and information,

please contact:

Taylor Robinson, President +1 (508) 982-‐1319 / [email protected]

This presentation is available for download at:

http://plgconsulting.com/category/presentations/

Date post:	14-Jul-2015
Category:	Business
Upload:	plg-consulting
View:	204 times
Download:	2 times

Plg union league railway supply group luncheon

Business