ftr presentation 09112014
DESCRIPTION
PLG presentation on crude by rail at FTR conference in Indianapolis: North American Crude By Rail Challenges and Growth AnalysisTRANSCRIPT
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Logistics Engineering Supply Chain
North American Crude By Rail Challenges and
Growth Analysis
Prepared for:
Indianapolis, INSeptember 11, 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
Institutional investors
About PLG Consulting
Partial Client List
North American Crude By Rail Challenges and Growth Analysis
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Deep rail industry experience
Operational
Commercial
Design & engineering
Equipment market
Broad CBR industry client experience over
past 3 years
E&P companies
Refiners
Terminal developers
Investors – private equity, hedge funds, investment
banks
Government agencies, industry advocacy groups
Equipment leasing
PLG’s Crude By Rail Industry Qualifications
Diverse projects
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
North American Crude By Rail Challenges and Growth Analysis
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Unconventional Energy Resources
US Shale (and Canadian) Western Canadian (WC) Oil Sands
Source: CAPP, About Oil Sands, June 2013
Innovative, new E&P technologies developed by
smaller entities has allowed additional hydrocarbon
production in new locations; each well <$10MM
“Mass production” methodologies developed to
lower costs
Challenges -> product variability and
volatility
Multi-billion dollar capital investments required by
a limited number of players to set up production
infrastructure
Open surface mining shifting to SAGD process will
harvest more bitumen over long term
Challenges -> distance to markets and
diluent
Source: EIA, May 2014
North American Crude By Rail Challenges and Growth Analysis
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PADD I Refineries
PADD V Refineries
PADD III Refineries
Oil Sands
PADD II Refineries
WaterborneImports
WaterborneImports Gulf of Mexico
Production
Alaska Production
WaterborneImports
California Production
PermianVertical Drilling
PADD III to PADD II
• Coastal refineries mainly supplied by waterborne imports
• Mid-Continent supplied from Gulf
N.A. Crude Logistics Flow
Before 2010
North American Crude By Rail Challenges and Growth Analysis
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PADD I Refineries
PADD V Refineries
PADD III Refineries
Oil Sands
PADD II Refineries
WaterborneImports
Gulf of Mexico Production
Alaska Production
WaterborneImports
California Production
Bakken
Permian
Eagle Ford
PADD III to PADD II
WaterborneImports
“Re-plumbing” in process• Pipelines are reversing,
repurposing and being built• CBR is a flexible, rolling
pipeline with multiple destinations
N.A. Crude Logistics Flow - 2014
North American Crude By Rail Challenges and Growth Analysis
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Shale Oil Challenges – Variability & Volatility
Shale oil is either light crude or
condensate with wide variation within
and between plays
Issues caused by variability include:
Two supply streams with additional logistics
methods are sometimes necessary
Heavy discounting of condensate and very light
oil as it is much less desirable to the refineries and
export volume has been limited so far
Rapidly growing light crude oversupply in
the US could cause a “Day of Reckoning”
at some point (2015~2020?)
Term coined by RBN and Turner, Mason & Co.
US crude oil production volume growing from
8.5M b/d to 12M b/d (2014 to 2019)
Including ~ 1.8M b/d of condensate (2019)
Could cause $15-20/bbl LLS discount vs. Brent Source: RBN Energy
Shale Development: The Evolving Transportation Impacts
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High Profile Accidents Changing Crude by Rail
Rail industry has a strong safety record, but optics of CBR
accidents in past ~year overwhelm any positive statistics
Regulatory approach has focused on:
Prevention – RR operations, track inspections, lower train speeds, increased
track-side technology, route planning requirements
Mitigation – Tank car engineering standards, enforcement of product testing
& classification
Response – Emergency response planning in case of accident
Three key links in supply chain are critical to safety:
At the well – increased enforcement of product testing, documentation and
traceability (FRA directive)
Railroad operating practices and maintenance procedures must be robust
Railroad operating rule changes on hazmat train handling
Increased scrutiny, insurance requirements
Short line and regional railroads in particular
May have consequences in CBR freight rates and lead time
Tank car design regulations
DOT NPRM released July 23
60 day comment period through end of September
Expect final ruling by early 2015
Example only
North American Crude By Rail Challenges and Growth Analysis
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U.S. DOT NPRM Potential Impact On CBR Growth
Classification $ characterization of mined gases and liquids (minimal)
Was expected; most parties have already taken steps to tighten process
Rail routing risk assessment (minimal)
Class 1’s had already agreed to do this voluntarily
Given limited options in some cases will not have significant impact to actual routings
Reduced operating speeds (minimal ~ large negative)
40 mph speed restriction for HHFT trains with any cars not meeting enhanced standard in:
High threat urban areas OR Areas of > 100k population OR all areas
If “areas of >100k population” or “all areas” is selected this could have negative impact
Enhanced braking (minimal ~ large negative)
If ECP braking system is required it would require large investments and modifications
Three tank car options announced for HHFT trains (minimal ~ large
negative)
PHMSA and FRA Designed Tank Car, AAR 2014 Tank Car, Enhanced CPC 1232 Tank Car
2 with shell thicknesses of 9/16”
NPRM expects existing 7/16” shells will meet new standard (9/16”) by adding an additional
1/8” thickness to the retrofitted jacket (no grandfathering in mentioned in NPRM)
Uncertainty on how many cars can actually have this performed and to what extent tank
car owners will want to retrofit
Tank CarInsulation
Top Fittings Housing Manway
Tank Jacket
Tank Shell
Tank Head
Head Shield
Source: API with PLG simplification
Bottom Outlet Valve/Protection Skid
North American Crude By Rail Challenges and Growth Analysis
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US Crude By Rail 2014 Growth Analysis
-
200,000
400,000
600,000
800,000
1,000,000
-
20,000
40,000
60,000
80,000
100,000
120,000
Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14
US CrudeOriginated(carloads/quarter)
Bakken Crude byRail (bbls/day)
Carloads/Quarter Bakken Bbls/Day
North American Crude By Rail Challenges and Growth Analysis
WTI-Brent
equilibrium
3Q3013
Source: NDPA, STB, PLG
Analysis, September 2014
Railroad performance related to severe winter and
large grain harvest
Slowing of crude production during severe winter
Decrease in CBR shipments to USGC due to pipeline
expansion
Delays in offloading terminals in PNW and CA
caused by environmental and permit issues
Bakken CBR lower in 2014 than predicted due to:
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Oil (bitumen) recovery uses two main methods
- mining and drilling (in situ)
20% of the Oil Sands reserves are close enough to the
surface to be mined using shovels and trucks (3% of oil
sands land area)
80% of the Oil Sands reserves will be recovered in situ by
drilling wells (97% of oil sands land area)
Steam Assisted Gravity Drainage (SAGD) is
most popular method
Two parallel wells are drilled
Upper well has high pressure steam continuously injected
Lower well recovers softened bitumen
Diluent is added to the bitumen (15~30%)
Diluent is very light oil or “condensate”
Enables the product to flow through pipelines and be
loaded into rail cars
Bitumen extraction has become profitable as
extraction technologies improved
Economical at ~ $ 45 - $ 65/bbl
Western Canada Oil Sands Production Processes
Mining
Source: www.epmag.com
Drilling - SAGD
North American Crude By Rail Challenges and Growth Analysis
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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 US and
Canada
NEB is extending 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 will temporarily switch the flows of Alberta
Clipper and Line 3 on 17.5-mile segment across the US-
Canadian border
Will maximize the flows under existing permits until the
Department of State review is completed on expansion
Increases Alberta Clipper flows by 27% to 570 kbpd by end
of September 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
Western Canada Crude Oil Pipelines
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)
Source: CAPP, June 2013
North American Crude By Rail Challenges and Growth Analysis
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Distance Challenge - Western Canada to US Gulf Coast
North American Crude By Rail Challenges and Growth Analysis
Western Canadian oil is landlocked and competes with global
waterborne crude supplies with much lower transportation costs
US Gulf Coast is natural home for western Canadian heavy crude
Up to 300 miles of feeder pipeline to rail/pipe terminals
Over 2,100 more miles on either pipeline or rail to US Gulf Coast
Long term committed pipeline has significant cost advantage vs
rail shipments of dilbit (reducing diluent amount increases rail
competitiveness)Source: Keystone XL EIS, PLG Analysis
Hardisty to US Gulf Coast
Pipeline Long Term Committed
Pipeline Uncommitted
Dilbit Unit train
Dilbit Manifest
Miles 2,125 2,125 2,475 2,475
Transit time for crude (days) 20 20 8 20
Total Cost ($/bitumen bbl) $18 $25 $25 $29
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Diluent Challenge (and Possible Solution?)
Bitumen and diluent definitions Bitumen - heavy, viscous oil that must be processed extensively to convert it into a crude oil
before it can be used by refineries to produce gasoline and other petroleum products
Diluent - lighter viscosity petroleum products that are used to dilute bitumen for
transportation in pipelines
Dilbit – bitumen blended with ~ 30% diluent; allows for crude to flow and meet pipeline specs
Railbit – bitumen blended with ~17% diluent; allows for crude to be transported by rail using
coiled and insulated tank cars
Purebit or Neatbit – raw bitumen with little to no diluent; special steaming equipment is
needed at loading and offloading terminals to transport in coiled and insulated tank cars
Diluent Recovery Unit (DRU) Removes diluent from crude blend at the terminal before it is loaded onto railcar
Diluent returned to field to be reused
MEG Energy is planning on building a $75 M DRU as part of a 250 mile pipeline system from its
Christina Lake project to Canexus, with completion targeted for late 2015
Several other parties/facilities are investigating units; total cost benefit still not fully evident
Challenge at unloading facility if it is NOT the refinery – bitumen needs to flow via pipeline
again
Diluent penalty Additional freight cost (rail cost from WC to USGC)
30% diluent vs 17% diluent: freight costs on 1.43 bbls vs. 1.20 bbls for each bbl of
bitumen @$25/bbl freight costs = $5.60/ bbl of bitumen
Geographical difference in value of diluent
Higher value of diluent in WC vs the value you’ll receive with it blended in bitumen in US
Gulf Coast
Source: CN
North American Crude By Rail Challenges and Growth Analysis
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20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14
Canadian CrudeOil Exports by Rail(bbl per day)
Bbls/day
North American Crude By Rail Challenges and Growth Analysis
Canadian Crude By Rail 2014 Growth Analysis
Source: National Energy
Board (Canada),
September 2014
Canadian Crude Oil Exports by Rail
Shutdown of Canexus Bruderhiem loading terminal due
to pipeline issues – was largest loading terminal in WC
Delays in opening of other unit train loading terminals in
western Canada
Tighter differentials between Canadian and US
landed import heavy crude prices
Over 100k b/d of crude is also moved within Canada
Canadian CBR lower in Q2 2014 then predicted
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Bakken and WC Crude Oil Takeaway Forecast
Source: www.CBRforecast.com
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2013 2014 2015 2016 2017
Base Case Takeaway (kbpd)
Pipeline
Crude by Rail
Local Refining
North American Crude By Rail Challenges and Growth Analysis
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Tailwinds
New WC pipelines will likely be
delayed beyond announced dates
Increasing Bakken & Oil Sands
production
Additional imports still to be
displaced in US east, west, USGC
More terminals coming online
US crude export ban easing
(condensate first)?
West coast export potential for WC
bitumen via rail?
N.A. Crude By Rail Future Drivers
Headwinds
Oversupply of light crude in the US
2014~2015 -> “Day of Reckoning”
Environmental hurdles at terminals
causing delays in permitting (CA, WA)
Tight railcar supply due to new rail car
regulations impact
WC pipelines will eventually be built
(2018 or beyond) and take CBR share
Potential regulatory backlash from
future disasters? (biggest wild card)
North American Crude By Rail Challenges and Growth Analysis
Logistics Engineering Supply Chain
This presentation is available at:www.plgconsulting.com/categories/presentations
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Thank You !For follow up questions and information,
please contact:
Taylor Robinson, President+1 (508) 982-1319 / [email protected]