Rail summit 06062014 final

Logistics Engineering Supply Chain

Why Shale Gas will Drive a US

Manufacturing Revolution

By Taylor RobinsonPLG Consulting President

June 6, 2014

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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

Financial services

About PLG Consulting

Partial Client List

Why Shale Gas will Drive a US Manufacturing Revolution

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Today’s Agenda

What is “new energy” and why is it a game changer for

the US industrial world?

Impact of shale natural gas and NGL supply streams on

US and global markets

Downstream impact of shale gas on US manufacturing

industries

Is shale gas a global phenomenon?


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What is behind the North American energy revolution?

Resources• N.A. shale plays

• Western Canadian oil sands

Technologies examples• Hydraulic fracturing

• Horizontal drilling

• Steam Assisted Gravity Drainage (SAGD)

• Evolving exploration and production technologies

• Tremendous productivity gains drives cost reductions

• Logistics infrastructure “re-plumbing” in

progress

• Product abundance… overabundance

• Imports displaced… exports grow

• Recoverable resources grow…sustainability

• Globally competitive power and material cost structure

• Manufacturing industries grow/return to North America

Recoverable Resources &

Enabling Technologies

Continuous Improvement

Energy Revolution


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Convergence of hydraulic fracturing and

horizontal drilling in past decade

Fracking first used in 1947

Revolutionary advances since 2009

Yields 3-10x the initial production rate of conventional

wells

US uniquely positioned for the techniques

Private mineral rights

Drilling intensity (wells per acre)

90% of rig fleet equipped for horizontal drilling

Location of shale plays

Rapid ROI for E&P companies

Typical well earns back capital cost in 1-2 years

Depending on play productivity, “break even” price of

~$65/bbl (WTI) for oil and $3.50/Mbtu for gas

Liquid plays providing highest returns currently and a

majority of drilling rigs are focused on liquids

Intentional dry gas drilling still flat

Shale Technology Introduction

GAS OIL THERMAL

Source: Baker Hughes


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New fracking techniques include:

More well bores per well pad

Directional bores to multiple shale layers

Reduced well spacing per acreage – increases

Zipper wells – stimulating two wells in tandem

Optimal lateral lengths

Lateral lengths had tripled since the start of horizontal

drilling, but this trend is being challenged by new practices

Zone fracturing

Micro-fracture testing at multiple points vs. one average

test that enables highest extractions of each zone

Shorter, fatter fractures

Bigger holes in casing combined with additional sand and

water use

Productivity gains continue!

Time required for drilling 15,000+ ft. well cut in half in last

two years (9 days vs. 18 days)

Eagle Ford example – new well oil production per rig has

increased by 150% over past 3 years

Lowers break even costs drive profitability improvements

New Fracking Techniques Drive Increased Production At Lower Costs

Source: Marathon, February 2014

Source: EIA Drilling Productivity Report, May 2014


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Shale Supply Chain and Downstream Impacts

Feedstock (Ethane)

Byproduct (Condensate)

Home Heating (Propane)

Other Fuels

Gasoline

Diesel

Gas

NGLs

Crude

Proppants

OCTG

Chemicals

Water

Cement

Generation

Process Feedstocks

All Manufacturing

Steel

Fertilizer (Ammonia)

Methanol

Chemicals

Petro-chemicals

Other Petroleum Products

Inputs Wellhead Direct

Output Thermal Fuels Raw Materials

Downstream Products

Jet Fuel

Availability of low cost hydrocarbons positively impact all the North American industrial economy


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Shale Gas History and Future Demand

Gas production has increased over past five years with a significantly lower gas rig count

1,000 rigs at peak down to ~300 rigs

Drilling productivity continues to increase production per well

and lower costs

And the Liquids (Crude, NGL) wells produce dry natural gas as a

by-product

Abundant US gas recoverable reserves

Low cost reserves in accessible locations near population

Marcellus gas production is the “eighth largest country” already

US will become a net gas exporter by 2020

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

Supply will overwhelm demand as prices approach $5

US government and capital constraints will likely limit LNG

export to protect US from world gas market price

Rig Count by Class vs. Gas Production

Source: Bentek, September 2013

Source: RBN Energy, January 2014


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Shale Gas Is Important To Competitive Power Costs

Natural gas is ~5X cheaper than oil on a BTU-basis

Innovation will convert more transportation

fuels and other energy requirements to

natural gas

US electricity prices are the lowest in the industrial world

US industries now have substantial power

cost advantage

Gas drives an increasing share of the US

electricity generation capacity

Will continue to displace coal due to stricter

environmental regulations on coal-fired

facilities

Natural gas is a cleaner burning fuel compared to other hydrocarbons

WTI & Henry Hub Natural Gas Energy Equivalent Pricing

Source: EIA, February 2014

~5X

Source: International Energy Agency, October 2013 *estimate


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Dry and Wet Gas Turn Into Downstream Products

All shale plays have gas as a major

or minor portion of the product stream

Processing required at each step

Raw Natural Gas(1500+ BTU)

Processing Plant

Consumer Quality Dry Natural Gas

Methane

Ethane42 – 65%

Propane~28%

Normal Butane~8%

Iso-Butane~9%

Natural Gasoline~13%

NGLs (3 -9 gallon / MCF)

Y-Grade

Key Petrochemicals

$/MMBtu

Methane $4.53

Ethane $3.64

Propane $11.41

Iso-Butane $16.01

Normal Butane $11.43

Natural Gasoline $20.35

Source: Opis, April 2014 & CME Group, April 2014

“Dry”

“Wet”Ethane

overabundancecausing deflated

pricing


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Repurposing and retirement of some

existing pipelines

New natural gas production has localized the

supply of natural gas for certain areas, therefore,

decreasing the need for some existing natural gas

pipelines

Some natural gas pipelines being converted to

crude oil

New natural gas pipelines are being

built to transport natural gas out of

Marcellus

Together the proposed Atlantic Sunrise project

and Sabal Trail project would connect Marcellus all

the way to Central Florida

Many other smaller pipeline projects are occurring

to move Marcellus natural gas

Historic reversals of import/export

trade flows

Northeast US-Canadian Maritimes

New Patterns in Natural Gas Supply & Demand

Source: Enbridge, April 2014

Natural Gas Movements


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Processing infrastructure being installed to

handle increased NGL supply

New facilities near shale plays

Domestic ethane supplies to quadruple by 2025

Exports of NGLs will continue to grow

NGLs are building blocks in chemical supply chain

US has shifted their petrochemical supply stream to >90%

ethane-based to leverage supply/cost advantage

Overabundance of NGLs Will Grow

Source: IHS Chemical, September 2013

Source: IHS Energy


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Natural Gas Liquids (NGLs)

Pipelines from Utica/Marcellus

Mariner East to Marcus Hook, PA for export

Mariner West exports to Sarnia, ON

ATEX to Mt. Belvieu, TX

Proposed Utica Marcellus Texas Pipeline to Mt.

Belvieu, Texas (conversion of natural gas

pipeline for most of the route)

New NGL export projects

Facility expansions and new construction

projects in Ferndale, WA and Port of Longview,

WA

Further expansions proposed by Enterprise

and Targa in their Gulf Coast export facilities

Phillips 66, Energy Transfer,

Williams/Boardwalk and Occidental have all

proposed export facilities out of the Gulf Coast

Natural Gas Liquids Pipelines and Export

Source: MarkWest, PLG analysis, March 2014

Sarnia, ON

Mt Belvieu, TX

Marcus Hook, PA

Source: RBN Energy, January 2014


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LNG Export Opportunity

Political/policy battle between domestic industrial users and producers

Only FERC approved LNG export terminal is Cheniere Energy’s Sabine Pass LNG in Sabine, LA

Proposed US LNG Export Terminals to FERC (in Bcfd):

There are 12 other US potential export terminals along with 3 Canadian proposed sites and 10 other Canadian potential sites

Supply Sources

Oil PricesDestination

Markets

Capital

Data in $US/MMbtu

Source: Waterborne Energy from FERC presentation, February 2014

Location Bcfd Location Bcfd

Freeport, TX 1.8 Lavaca Bay, TX 1.38

Corpus Christi, TX 2.1 Elba Island, GA 0.35

Coos Bay, OR 0.9 Sabine Pass, LA 1.40

Lake Charles, LA 2.2 Lake Charles, LA 1.07

Hackberry, LA 1.7 Plaquemines Parish, LA 1.07

Cove Point, MD 0.82 Sabine Pass, TX 2.1

Astoria, OR 1.25


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Panama Canal Expansion Has been delayed and now expected at full

capacity by 2016

Current Panamax vessel size excludes all but 10% of LNG vessels from using the canal

After expansion, 80% of LNG fleet will be able to use the canal with vessel capacities up to 100 MMcf

Benefits for N.A. LNG Exports Using the expanded Panama Canal will be a

natural fit for the large number of proposed Gulf Coast export facilities wanting to reach the growing Asian LNG market

Trip time cut from 64 days to 44 days, greatly improving the competitive position of LNG exports by reducing transportation cost

Panama Canal Expansion and North American Exports of LNG




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2008 2010 2012 2014 2016 2018 2020

Source: American Chemistry Council, February 2014

>$100B of Chemical Expansion Announced

Phase III – “Manufacturing”: Raw material cost driven

Phase I – Industries using gas as primary

feedstock have global cost competitiveness;

new US factories being built

Phase II – Downstream products require

significant processing facilities investment and

lead time

Phase III – US material cost advantage will

enable traditional manufacturing to return to

the North America as about 65% of the cost of

manufactured product is material cost

Shale Gas Phased Impact To NA Industrial Renaissance

Phase II - Downstream Products: Resins, Chemicals

Phase I - Gas & Power-intensive Industries: Steel, Fertilizer, Methanol


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Phase I - Steel, Methanol, & Fertilizer Manufacturing in US

Shale gas boom makes direct-reduced iron steel

economical

Gas strips oxygen from iron core to make high purity/quality

pellets – lower cost vs. scrap steel

$2B+ in new US projects announced

DRI-derived steel of higher quality than that scrap steel

U.S. methanol production – 10 projects announced

Methanol is used in numerous downstream chemical products

Captures price spread between low-cost natural gas and

methanol allowing move to higher value foreign markets

US currently represents 10% of the global market demand and

imports 89% of its supply

Natural gas is a feedstock for ammonia production

Represents ~70% of cash costs (CF Industries)

12MM mt new domestic manufacturing capacity announced

Imports will quickly be displaced

Source: IHS Energy, September 2013

Falling Gas Prices a Boon to DRI Production

Source: GE Capital presentation, November 2013


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Phase II - Low Cost NGLs Provides Significant Cost Advantages for Chemicals and Resins

US has a large structural cost advantage due to gas-based ethane for downstream products

Europe and Asia are tied to crude-based naptha as a feedstock for their

downstream processing

US production cost of ethylene is ~40% less than Europe and Asia

However, US ethylene cracker and processing capacity is tight and ethylene prices are inflated in the short term

Ethane cracker margins have been as high as 50-60 cents/lb

Additional cracker capacity expected in 2016/2017

Margins/prices will moderate as more capacity comes online

New US resin facilities also on the drawing board

Excess resin capacity will promote globally competitive prices and large

export increases

k to

ns k to

ns

Source: Townsend Solutions, December 2013

Source: Townsend Solutions , December 2013

30,000

40,000

50,000

2012 2013 2014 2015 2016 2017 2018 2019 2020

North America Ethylene Expansions

Actual Capacity Additional CapacitySource: Townsend Solutions , December 2013


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Phase III - Material Cost Advantage Is Key Cost Driver to Future North American Manufacturing Growth

Materials normally accounts for 60-70% of manufacturing cost of goods sold (COGS)

Most product cost competition is won or lost here

Shale gas giving NA cost advantage for steel, plastics and chemicals

Total labor cost is ~20% of COGS for NA manufacturers

China labor cost in $ will continue to rise due to inflation and currency

appreciation

Mexico labor has increased competitiveness vs. China, will recapture

manufacturing share for medium/high labor manufacturing

Transportation & Logistics costs are in “Other” 15%

Asia/China has 5~10% cost disadvantage due to extra ~ 1 month shipping

lead time (major cash flow disadvantage)

Mexico has “near shore” advantage vs. Asia

Transportation costs continue to rise – proximity to market advantage

Energy cost is usually less than 5% for final manufacturer

However, energy costs are buried in raw material costs and transportation

and can be more substantial in energy-intensive products

US/Canada has a tremendous advantage vs. industrialized world

Mexico’s power costs will become more competitive with shale gas


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Russia

Siberian reserves are said to be 80X of Bakken

Total, Shell, Exxon, Statoil all investing

Second place soon?

China

Reserves in remote, mountainous locations

Technology transfer challenges

Only one oil company involved – stifles innovation

Argentina

Concerns with governmental regulation, price controls

Struggling with high cost proppants

Poland

Reserves not productive so far – Exxon, Marathon gave up

Encouraging recent results?

UK

Some gas reserves

Government support, but intense environmental opposition

Is Shale Energy A North American Phenomenon?

Source: EIA, June 2013

0

10

20

30

40

50

60

70

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Shale Oil Resources (Billion bbls)

0

200

400

600

800

1,000

1,200

Shale Gas Resources (Tcf)

Technically Recoverable Resources, Source: EIA, June 2013


Logistics Engineering Supply Chain

This presentation is available at:www.plgconsulting.com/categories/presentations

-

Thank You !

For follow up questions and information, please contact:

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

http://www.plgconsulting.com/categories/presentations

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