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Logistics Engineering Supply Chain
Lower Oil Price Implications for the
North American Rail & Rail Equipment
Markets
Taylor RobinsonPresident
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
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
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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 Crude By Rail 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
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
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Phil IrelandSenior Consultant
Phil has extensive hands-on senior level
experience in supply chain management, asset
sizing, strategy, and network optimization
gained from 30 years working with the
Canadian Pacific Railroad where he was
responsible for development and execution of
the $5 billion revenue plan. Phil has specific
experience in developing crude by rail supply
chain solutions including asset optimization
and pipeline terminal development. Based in
Calgary, he brings special expertise in
Canadian oil sands crude and the associated
transportation, terminaling, producer, and
refining issues.
Professional Experience
VP Service Design & Asset Optimization, Canadian Pacific Railway
Board Member, Indiana Harbor Belt Railroad
CRUDE BY RAIL / CANADA
Taylor RobinsonPresident
Taylor brings more than 25 years of executive
supply chain experience spanning automotive,
aerospace, food, and wind turbine industries
before joining PLG as the President. Utilizing
his real-world, global experience, Over the
past two years, Taylor has led PLG to grow
significantly by adding team network bench
strength, expanding their energy practice and
solidifying PLG’s reputation as the
unconventional energy logistics authority.
Professional Experience
VP Supply Chain and Production, Northern Power Systems
Executive VP of Supply Chain, Watts Water Technologies
Chief Procurement Officer, HJ Heinz
Director of Strategic Sourcing, Honeywell Aerospace
Procurement Manager, Honda of America
LEADERSHIP
PLG Crude by Rail Experts On the Call
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
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ssSource: 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
Steam Assisted Gravity Discharge (SAGD)Horizontal Drilling & Hydraulic Fracturing
Source: Marathon, February 2014
“Moore’s Law” at play:
Exponential advances in technology, resulting in:
-Declining costs
-Surging production
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
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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
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
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Chemical Industry Growth -- Front End of the N.A. Industrial Renaissance
October 2014
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
>$130B of announcedprojects over 10 yearsaccording to ACC
8
• 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 So Far….
Source: CAPP Report, June 2014
Source: RBN Energy, December 2014
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
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NA Crude Logistics Pre-2010
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 Demand
8,150kbpd
Permian
ANS
Imports
Imports
Rail
Pipeline
Marine
Oil Sands
Imports GOM
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
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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
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
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…But 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…
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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%
• 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
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
U.S. Land Oil Rigs
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U.S.
…However, Crude Oil Production Will Continue To Grow
Canada
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 2015Source: 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 level
• 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
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0
200
400
600
800
1,000
1,200
1,400
1,600
0
50,000
100,000
150,000
200,000
250,000
Op
era
tin
g U
.S. L
an
d O
il R
igs
Ca
rlo
ad
s H
an
dle
d
U.S. Land Oil Rigs
All Sand Carloads
Petroleum Carloads
Rail Traffic Impact - Frac Sand vs. Crude by 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 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
20
10-Q
1
20
10-Q
2
20
10-Q
3
20
10-Q
4
20
11-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 O
ct
20
14 N
ov
U.S. Crude by Rail Volumes (kbpd)
US Crude Originations Bakken Crude Originations
0
200
400
600
800
1,000
1,200
1,400
Jan-1
1
Apr-
11
Jul-1
1
Oct-
11
Jan-1
2
Apr-
12
Jul-1
2
Oct-
12
Jan-1
3
Apr-
13
Jul-1
3
Oct-
13
Jan-1
4
Apr-
14
Jul-1
4
Oct-
14
US Bakken Basin Crude Production and Rail Transport (kbpd)
Production Crude by Rail
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
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Historical Canadian Crude By Rail Growth
Source: National Energy Board (Canada), January 2015
» Canadian CBR lower in 2014 then predicted
Shutdown of Canexus Bruderhiem loading terminal due to pipeline issues – was largest loading terminal in Western
Canada
Delays in opening of other unit train loading terminals in Western Canada
Tighter differentials between Canadian and U.S. landed import heavy crude prices since Q1 2014
Approximately 85 kbpd of crude was also moved within Canada in addition to above export volumes
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
2012-Q1 2012-Q2 2012-Q3 2012-Q4 2013-Q1 2013-Q2 2013-Q3 2013-Q4 2014-Q1 2014-Q2 2014-Q3
Canadian Crude Oil Exports by Rail (bbl per day)
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
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Pipeline Build-out Remains Key Logistics Issue for Oil Sands
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
Increased Alberta Clipper flows by 27% to 570 kbpd in September
2014 and potentially up to 800 kbpd in 2015
Large Canadian oil producers and pipeline companies
are strategically investing in CBR as a flexible option to
pipelines for the short and long term
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)
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
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North American CBR Volume Forecast
-
100
200
300
400
500
600
700
800
900
2013 2014 2015 2016 2017 2018 2019
North American Crude by Rail Volume Forecast (kbpd)
Bakken
Western Canada
Niobrara
Permian
Source: PLG Crude by
Rail & Tank Car
Forecast, Feb. 2015
Note: Based on current $50-55 WTI priceremaining constant
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
• 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
19
Bakken Production and Takeaway Share
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
-
200
400
600
800
1,000
1,200
1,400
1,600
2014 2015 2016 2017 2018 2019
Bakken Takeaway Forecast (kbpd)
Crude by Rail Forecast
Pipeline Forecast
Local Refinery Forecast
Note: Based on current $50-55 WTI priceremaining constant
Source: PLG Crude by
Rail & Tank Car
Forecast, Feb. 2015
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
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-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
2014 2015 2016 2017 2018 2019
Western Canada Takeaway Forecast (kbpd)
CBR Forecast
Pipeline Forecast
Local Refinery Forecast
Note: Based on current $50-55 WTI priceremaining constant
Western Canada Production and Takeaway Share
Source: PLG Crude by
Rail & Tank Car
Forecast, Feb. 2015
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
Proportion of production handled by rail expected to ramp up through 2017 and then drop back as pipeline capacity starts to develop
21
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
Current 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 CarInsulation
Top Fittings Housing Manway
Tank Jacket
Tank Shell
Tank Head
Head Shield
Source: API with PLG simplification
Bottom Outlet Valve/Protection Skid
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
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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”
New-build production schedules are “full” through mid-2016….for now
A few late-2015 low volume, new-build slots are available through negotiation
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
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
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Presentation Summary
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 shale oil and
crude by rail volume in the short term
Tank car and small covered hopper market has shifted gears to
“neutral” for now
Expect volatility in the middle and later innings as well!
Lower Oil Price Implications for the North American Rail & Rail Equipment Markets
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/