1
Professional Logistics Group
1
Shale Development: Frac Sand Logistics and
Rail Supply Chain Impacts
Prepared for: Southwest Association of Rail Shippers
San Antonio, TX | February 23, 2012
» Boutique consulting firm specializing in transportation, logistics, and supply chain Established in 2001 Over 80 clients and 200 engagements
» Headquarters in Chicago USA, with team members throughout the US and with “on the ground” experience in: North America / Europe / South America / Asia / Middle East
» Consulting services Strategy & optimization Assessments & benchmarking Transportation assets & infrastructure Logistics operations M&A/investments/private equity
» Specializing in the logistics of Oil & gas Chemicals & plastics Wind energy & project cargo Bulk commodities (minerals, mining, agricultural) Industrial & consumer goods
About Professional Logistics Group
2
Viewed as a cost center Non-strategic Afterthought Minimal investment
Spectrum of Logistics Sophistication – Shipper Organizations
3
» Senior management approach to logistics:
» Corresponding outcomes:
Senior level engagement Capital commitments Technology commitments Integral to commercial success
Disadvantaged cost structures Asset inefficiency Infrastructure inefficiency Unable to leverage logistics for
commercial advantage
Advantaged cost structures Efficient users of rail and other options Mode and carrier competitive options Able to leverage logistics for
competitive advantage
HIGH LOW
Exacerbating Factors: Gold Rush Conditions
» Other recent energy “boom” events with major transportation impacts
4
» Common characteristics New technology breakthroughs and/or dramatic market shifts Speed to market is paramount Rush of capital and new players Low-end spectrum conditions compounded
Shale Driving Growth in Natural Gas and Crude Oil Production
» 1,989 rigs in operation as of 10 February 2012
» Rush of capital into the industry
» Domestic oil production at eight-year high
» 700% increase in shale gas production since 2007
5
Long-Term Shale Development Outlook is Positive
» Strongest growth in natural gas, crude oil, and non-hydro renewables through 2020
» Domestic production forecasted to reduce total energy imports over time
» Shale projected to account for nearly half of all US natural gas production by 2035
» However, expect periodic market turbulence
6
Benefits Go Beyond Energy
7
» Shale development a “net win” for United States
Highly advantaged NGL cost structure vs. rest of world (ethane vs. naphtha)
Creates strong, long-term export market for US polyethylene and other petrochemicals
Jobs creation
Trade deficit reduction
Source: American Chemistry Council
Shale Play Product Flows Outbound
» Natural Gas Majority via pipelines, some trucks
» Natural Gas Liquids (NGLs) Requires processing (fractionation) 3-9 gallons/MCF (thousand cubic feet)
– Ethane 63% – Propane 22% – Butane 8% – Pentane 5% – Other 2%
» Crude Oil Bakken play as a model Strong potential for Utica play
8
Shale Development Driving Growth in Crude-by-Rail Activity
9
Year WellsProduc.onbbl/day
RailCL/DayShippedat15%‐23%share
2010 2300 320,000 66
2011 4000 535,000 170
2013projected 5000 700,000+ 250
Wells BBL’s/Day Rail Car CL/Day
» Bakken crude oil metrics and future projections
Source: Progressive Railroading, North Dakota Pipeline Authority, PLG analysis
Crude Handled by Railroad C
arlo
ads
Quarterly Data
STCC 13111 Source: US Rail Desktop 10
Traffic Flows Inbound - Shale Plays
11
» Per well:
Frac sand (multiple grades) 15-30+ carloads Most desirable product originates in Wisconsin
and Minnesota
OCTG (oil country tubular goods) 4-6 carloads equivalent
Water 3-5 million gallons Locally-sourced
Chemicals Various origins Equivalent of two carloads
Correlation of Operating Rig Count and Sand Shipments
0
500
1,000
1,500
2,000
2,500
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
2007 Avg. 2008 Avg. 2009 2010 2011
Ope
ra.ngOnsho
reRigs
Carloa
ds
QuarterlyData
Opera<ngOnshoreRigs
STCC 14413 Source: US Rail Desktop, Baker Hughes 12
All Sand Handled by Railroad C
arlo
ads
Quarterly Data
STCC 14413 Source: US Rail Desktop 13
All Sand Forwarded by Railroad C
arlo
ads
STCC 14413 Rail traffic data source: US Rail Desktop; map source: Bruce Brown, PhD., Wisconsin Geological and Natural History Survey
» Red areas indicate “optimal” frac sand sources Well rounded grains Nearly 100% quartz Other areas produce sand too angular or contaminated
with other minerals or fragments
14
All Sand Received by Railroad
STCC 14413 Source: US Rail Desktop 15
Car
load
s
Changes in Rail Shipment Pricing Q3 2011 vs. Today - Sand
$‐
$0.010
$0.020
$0.030
$0.040
$0.050
$0.060
$0.070
$0.080
$0.090
$0.100
RawUnitTrain ProcessedUnitTrain ProcessedManifest RawUnitTrain ProcessedUnitTrain ProcessedManifest
High
low
Average
RateperTon‐MileToday(excludingfuelsurcharge)
RateperTon‐Mile3Q2011(excludingfuelsurcharge)
UnitTrains1000‐1200Miles
Manifest600‐1300Miles
Source: PLG analysis 16
Sand Railcar Market Conditions
» New-build market may have peaked 3Q 2011: 8-10 month backlog; 4-6 month backlog today ~10,000 cars on backorder; trending downward Major RFQs mostly played out Some new-builds sent straight to storage due to declining
natural gas prices
» Lease market also at or near peak Mild downward pressure on lease rates Fewer spec orders; now mostly deal-specific
» Long-term horizon Construction revival may renew tight conditions for
small cube hoppers Trend towards unit trains will improve cycle times and
utilization Fewer sub-optimal cars (i.e. grain) in sand service “Bust” scenarios due to gross overbuilding (i.e.
centerbeams) unlikely
17
Systemic Challenges – Sand Logistics
» Who controls and/or pays for freight Model still not fully evolved Fragmentation among key players – Sand producers – Oilfield services companies – E&P companies
» Sand sourcing NIMBY issues in mining areas New market entrants with varying levels of
capitalization, reliability
18
» Bulk truck supply Equipment availability Driver shortage Dry bulk tank construction backlog
(~15 months)
Recent Market Turbulence
» Price fluctuations create whipsaw effect in number and location of drilling rigs Shift in drilling activity from dry gas to NGLs and crude
» Logistics planning uncertainty Inventory/grade (mesh) dislocation Difficulty in distribution network planning (transload, storage, delivery) Asset utilization and deployment Capex
19
Layers of Inefficiency Within the Frac Sand “Ecosystem”
20
» Natural order of varying levels of logistics management sophistication… Non-strategic view of logistics Secondary consideration
» …compounded by gold rush conditions... Speed to market is paramount New market players, sources of capital
» …compounded by systemic challenges… Fragmented control of logistics spend and operations Sand sourcing Bulk trucking constraints
» …compounded by market turbulence…. Unpredictable demand volumes and locations Inventory, asset slack-action
Completions/Hydraulic FracturingCollege Degree Positions
!"#$%&"'()*+,-+""$)./%(0&"#-%+123) !"#$%&#'()*+,-'./0'+&1'
!"#$%&%'($&)*+&,%&-*.$&/*(($/0123&&4-'/"0,*.5&&6373&8$0(*1$'!&
4.9,.$$(,.9&:;<=<<<&>?@(3
Evolution of a Gold Rush
» Maturation and stabilization of boom markets are inevitable
21
» Common characteristics of boom market maturation Declining demand and/or weakened pricing, plus margin compression Smaller/weaker/less sophisticated players exit, largely due to non-product related factors Aggregation of volume and market power accrues to larger, better capitalized players Standardization of transportation methods, practices, procurement Logistics becomes an important platform for competition
Logistics Cost as a Percentage of Product Value
» Frac sand is highly sensitive to logistics costs relative to past energy “booms”
Ethanol 8%
Wind turbine 12%
Representative logistics costs for example sand price of $180/ton
Rail Freight Rate: 28%
Rail Fuel Surcharge: 2%
Railcar Lease: 2%
Trucking & Transload
to Drill Site: 22%
Destination Transload: 4% Processed Sand: 42%
Frac sand 58%
Source: PLG analysis 22
Getting Ahead of the Curve
» Like other “gold rushes” before it, market will evolve and mature
» Transportation buying power/leverage will accrue to fewer, more efficient, and sophisticated buyers
Becomes a key competitive advantage when gold rush stabilizes
» Opportunity exists for to establish competitive advantage now
Move “up” the logistics sophistication spectrum First-mover and vertical integration are key
» Recommendations for transportation and service providers
Understand your customers’ business Deliver value and think entrepreneurially Anticipate change
23
Thank You! For follow up questions and information, please contact:
Graham Brisben, President +1-708-386-0700 / [email protected]
Jean Arndt, Vice President-Operations +1-630-505-0273 / [email protected]
Jeff Dowdell, Senior Consultant +1-732-995-6696 / [email protected]
Gordon Heisler, Senior Consultant +1-215-620-4247 / [email protected]
Jeff Rasmussen, Senior Consultant +1-317-379-5715 / [email protected]
Mike Spahis, Senior Consultant & Project Leader +1-214-392-7263 / [email protected]
This presentation is available at: WWW.PROLOGISTICSGROUP.COM 2424