goldman sachs industrial conference nov 12, 2014 t robinson
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PLG Consulting at Goldman sachs industrial conferenceTRANSCRIPT
Logistics Engineering Supply Chain
Why Shale Gas Will Drive a U.S.
Manufacturing Revolution
Goldman Sachs Industrials Conference 2014
By Taylor RobinsonPLG Consulting President
Nov 12, 2014Boston, MA
2
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 U.S. Manufacturing Revolution
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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
Why Shale Gas Will Drive a U.S. Manufacturing Revolution
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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
Why Shale Gas Will Drive a U.S. Manufacturing Revolution
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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
Why Shale Gas Will Drive a U.S. Manufacturing Revolution
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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
Why Shale Gas Will Drive a U.S. Manufacturing Revolution
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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
Why Shale Gas Will Drive a U.S. Manufacturing Revolution
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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
Why Shale Gas Will Drive a U.S. Manufacturing Revolution
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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
Why Shale Gas Will Drive a U.S. Manufacturing Revolution
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Over $120B of Chemical Investments Have Been Announced
US Gulf Coast will continue to process >80% of North
American NGLs & chemicals -increased product movement
and logistics required
Ethylene and Propylene
Ammonia and Derivatives
Methanol
Polymers and Resins
Chlor-alkali
Other
Why Shale Gas Will Drive a U.S. Manufacturing Revolution
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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
Why Shale Gas Will Drive a U.S. Manufacturing Revolution
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]