1

Logistics Engineering Supply Chain

GE Capital

Oil & Natural Gas: The Evolving Freight Transportation Impacts Prepared for

October 15, 2013 New York, NY

2

»  Boutique consulting firm specializing in logistics, engineering, and supply chain §  Established in 2001 §  Over 100 clients and 250 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

»  Key industry verticals §  Oil & gas §  Chemicals & plastics §  Wind energy & project cargo §  Bulk commodities (minerals, mining, agricultural) §  Industrial manufactured goods §  Private equity

About PLG Consulting

3

The Shale Development Revolution – Big Picture

Disruptive Technologies

•  Hydraulic Fracturing •  Horizontal Drilling

Continuous Evolution

•  Productivity •  Rapid Change

Market Dynamics •  Supply & Demand •  Customers •  Price •  Logistics

3

4

Hydraulic Fracturing and Horizontal Drilling

»  Transformational technologies working in concert §  Hydraulic fracturing AND horizontal drilling

»  US uniquely positioned for the techniques §  Private mineral rights §  Drilling intensity (wells per acre) §  90% of rig fleet equipped for horizontal drilling

»  Rapid ROI for E&P companies §  Typical well earns back capital cost in 1-2 years §  Depending on play productivity, “break even” point of $40-85/

bbl §  Liquid plays providing highest returns

Source: L. Maugeri, Harvard Kennedy School; RBN; PLG analysis; BENTEK

5

Rapid Improvements in Operational and Cost Efficiency

Source: BENTEK, September 2013 Source: Southwestern Energy investor presentation, June 2013

Representative Productivity Gains – Fayetteville Shale Play

»  Evolution of drilling technology §  Fracking first used in 1947 §  Revolutionary advances since 2009 §  Time required for drilling 15,000+ ft. well cut in half in last two years (nine days vs. 18) §  Dramatic increase in efficiency per rig, making rig count alone no longer a significant indicator of production §  Hydraulic fracturing/horizontal drilling yields 3-10x the initial production rate of conventional wells

6

Shale Driving Growth in Natural Gas and Crude Oil Production

Source: Baker Hughes 2013

»  1,756 rigs in operation in USA as of Oct. 4, 2013

»  Dramatic production growth §  700% increase in gas production since 2007; forecast to grow 9 Bcf/d

from 2012-2018

§  Domestic oil production at 22 year high; forecast to reach 10MM bbl/d by 2018

»  U.S. is on track to pass Russia as the world’s largest producer of oil and gas combined this year (Wall Street Journal, Oct. 2, 2013)

GAS OIL THERMAL

Source: Baker Hughes

Source: EIA

U.S. Crude Oil Production

July 2013 7.49 MM bpd

Source: Bentek

7

US Shale Plays

Gas: Marcellus Haynesville Barnett Oil: Bakken Eagle Ford Permian Basin

Most Active Plays

Utica (NGLs) Niobrara Mississippi Lime

Emerging Plays

8

Shale Development Supply Chain and Downstream Impacts

Feedstock (Ethane)

Byproduct (Condensate)

Home Heating (Propane)

Other Fuels

Other Fuels

Gasoline

Inputs >> Wellhead >> Direct Output >> Thermal >> Fuels >> Raw Materials >> Downstream Products

Gas

NGLs

Crude

Proppants

OCTG

Chemicals

Water

Cement

Generation Process Feedstocks

All Manufacturing

Steel

Fertilizer (Ammonia)

Methanol

Chemicals

Petroleum Products

Petrochemicals

9

»  Over $95B in new announced “energy intensive” industrial plant expansions will come on-line over the next five years §  ~50% foreign direct investment

»  Shale development impact on the

railcar industry is long-term, wide-ranging, and positive with only one exception

Railcar Industry Impacts

10

Hydraulic Fracturing Materials Inputs and Logistics – Per Well

Materials

Chemicals

Clean Water/ Cement

Proppants

OCTG (Pipe)

Source to Transloading

2

Local source

40

5

Transloading to Wellhead Site

8

~1,000

160

20

47 Total Railcars

~1,200 Total Truckloads

Oil/Gas/NGLs

Truck, Rail, Pipeline

Waste Water

~500 Total Truckloads

11

Correlation of Operating Rig Count with Sand and Crude Shipments

STCC 14413 (sand) and 13111 (petroleum) Source: US Rail Desktop, Baker Hughes

0

500

1,000

1,500

2,000

2,500

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2007 Avg. 2008 Avg. 2009 2010 2011 2012 2013

Ope

ratin

g O

nsho

re R

igs

Car

load

s

Operating On Shore Rigs All Sand Carloads Petroleum Carloads

12

All Sand Handled by Railroad

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Car

load

s

Quarterly Data

UP

BNSF

NS

CN

CSXT

CPRS

KCS

STCC 14413 Source: US Rail Desktop

13

Upper Midwest Sand Shipping Flows

Major Frac Sand Mining Areas

Frac Sand Transloading Clusters

Major Frac Sand Rail Traffic Lanes 13

14

U.S. Frac Sand Industry Trends

»  Industry consolidation continues, with focus on integrated supply chains §  Hi-Crush purchase of D&I Silica (May) §  US Silica multi-year agreement with Wildcat Minerals (August) §  FTS International sand and logistics (non-truck) divestiture to Fairmont Minerals (July) §  PE firms continue to be interested in this space

»  Class I railroad/sand supplier alliances are likely to continue §  US Silica – BNSF facility in San Antonio §  Others in progress

»  Significant barriers to entry §  2 - 3 years to secure property, permit, and begin construction §  Increasing concerns regarding environmental, health, agricultural and infrastructure impact at the

state and county levels -  OSHA August 23, 2013 announcement regarding proposed crystalline silica exposure rules

-  Counties commissioning studies regarding property value and agricultural impacts

15

Processed Sand Total Delivered Cost per Ton

Source: PLG analysis using BNSF public pricing – does not include fixed assets at origin or destination

»  “Benchmark” unit train example – Illinois to South Texas §  Single-line haul (one rail carrier)

§  Private railcars

§  Railcar fleet achieving two round trips per month

§  Origin sand facility has direct rail load-out

§  Destination trucking is less than 100 miles

»  Unit train operations include efficient origin/destination handling §  24 – 36 hours per train

»  Manifest service would increase rail-related costs by 17% §  Increased freight rate (14% higher)

§  Railcar fleet only achieves one turn per month, on average

§  Additional trackage required to accommodate larger fleet

§  Delivery patterns are more variable, requiring additional destination storage and inventory

Total Delivered Cost per Ton ~ $122

Sand, 33%

Destination Transload

& Trucking, 25%

Rail - Freight, FSC and

Eqp Lease, 42%

Logistics costs drive ~ 67% of total delivered

sand cost

16

Supply Chain Critical to Success in Sand Industry

Mining Processing Rail Load-out

Long Haul Rail

Transloading and Storage

Trucking to Well

»  End customers will continue to mix in-sourcing and outsourcing §  Early in-sourcing driven by supply assurance and controlling own destiny

§  Can outsource beat the most efficient in-sourcing?

§  Will the end customers consider sand to be core competency?

»  End customers desire “Storefronts” – Choosing between Walmart and Target would be best §  Allows them to focus on their core competencies

§  Minimizes their inventory costs while maximizing their flexibility

»  Sand supply winners understand the total cost structure, leverage each link of the supply chain and understand cost trade-offs

Best “Tier 1”

suppliers will win

17

Sand Railcar Market Conditions

»  Conditions are normalizing §  Builder backlog has been resolved

–  Wait time is now attributable to other car types in the pipeline

§  Many surplus cars have found homes §  2013 total production of sand cars will be closer to the

historical average of 2,000 – 3,000 units

»  Lease market settling into familiar patterns §  Traditional pricing behavior: Newer/286k cars more

expensive than older/263k cars §  Cars with sub-optimal design (i.e. older grain cars) being

flushed out and replaced where possible §  Lessors placing modest “spec” orders §  Credit-worthiness of lessee is still a critical criteria §  Market is still trying to find its feet

»  Looking forward §  Positive developments in housing/construction should

equate to additional demand for small cube hoppers

18

Looking Ahead: What Will the Frac Sand Industry Look Like in 3 to 5 Years?

»  Frac sand industry will likely have significant growth in the coming years

§  Growth rate driven by liquids now – crude, NGL, condensate §  New sources of gas demand will drive gas drilling growth eventually §  Natural sand is the preferred proppant; larger well trend continues

»  “Survival of the fittest” supply chain – the evolution will continue

§  “Tier 1” supply base will further consolidate smaller players §  The best niche players will thrive as 2nd tier and in small plays §  Supply chain practices and technology flow in from other industries §  Continuous Improvement mindset required to win

»  Heavy focus on cost reduction will continue §  Cost and margin will continue to be rationalized – direct and soft §  Difficult to win without volume leverage

–  Sand supply –  Unit trains –  High volume transload and storage capability

19

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 ~42-65% –  Propane ~28% –  Normal Butane ~8% –  Iso-Butane ~9% –  Condensate ~13%

»  Crude Oil §  Bakken play as a model §  Surging Permian and Eagle Ford development

20

Shale Development Natural Gas Impacts

»  Industry a “victim of its own success” §  Fracking results in oversupply; gas prices down

33% since 2010 §  Breakeven gas price at 10% IRR: ~$3.25 mm/btu §  Rigs leave Marcellus, other gas plays for oil plays

(~700 “non producing” wells in PA) §  Helped to deflate frac sand boom

»  Lower gas prices have resulted in 10-13% market share capture from coal for thermal generation

»  Low gas prices fueling industrial

renaissance §  Overall manufacturing (cost of electricity; “re-

shoring”) §  Specific sectors that use natural gas as a

feedstock –  Methanol (16MM m/t new capacity under consideration) –  Steel –  Fertilizer

20 Source: RBN, PLG analysis

Source: RBN

21

Natural Gas Displacement of Coal for Thermal Generation

»  Natural gas now supplying approx. 30% of thermal fuel demand (~13% share capture from coal)

»  Despite recent increases in prices, natural gas share

capture expected to maintain or grow §  Environmental regulations of coal burning §  Scheduled coal unit retirements; 55GW through 2020

»  Adversely affecting coal industry, railroad coal loadings §  US coal consumption declined 21% from 2007-2012

21 Source: RBN Energy, June 2013

Fuel Cost Comparison for Electricity Generation

Source: Bentek, PLG analysis

22

Shale Related Rail Traffic Still Small Relative to Coal Volumes

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2008

2009

2010

2011

2012

2013

Sand

Crude Coal

Car

load

s

Quarterly Data

Sand

Crude

Coal

STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop

Railcars Handled: Sand, Crude, & Coal

23

Coal, Crude & Sand Trends: Carloads and Revenue

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

-

1

2

3

4

5

6

7

8

9

10

Bill

ions

Mill

ions

Carloads Revenue

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

-

200

400

600

800

1,000

1,200

1,400

Bill

ions

Thou

sand

s

Sand Crude Revenue

STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop

Total Coal Carloads and Revenue Combined Sand and Crude Carloads and Revenue

24

Shale Gas Driving Steel Manufacturing Comeback in US

»  Shale gas boom makes direct-reduced iron steel economical §  Not new technology, but preferable with lower cost natural gas §  DRI process uses natural gas in place of coal to produce iron §  At current gas prices, DRI can generate iron pellets at a cost of $260 to

$280/ton vs. scrap steel currently trading at ~$390/ton §  DRI-derived steel of higher quality than that created from recycled

scrap, further driving demand

»  U.S. jobs and international investment §  Steel production in the U.S has shrunk 14% since Jan. 2008 –  Compare to 15% growth in steel production internationally

»  Reciprocal growth §  Increased demand for U.S. steel creates greater demand for U.S. gas §  Tubular steel products has 8% yearly growth in demand, driven by

increase in shale oil and gas §  Joint venture between Nucor Corp. and Encana Corp. commits $3

billion to development of new gas wells to support DRI plants –  Nucor’s plant with 2.5 million tons of DRI capacity is expected to open end of

2013

§  Voestalpine $740MM investment in Texas for direct reduction plant with 2 million metric ton capacity, due to begin operations in late 2015

§  Potential US Steel-Republic Steel JV to produce DRI

Source: World Steel Association

25

Shale Gas Encourages Upgrade of Natural Gas to Methanol

»  Upgrade low-cost natural gas to methanol §  Primary uses are production of

formaldehyde, acetic acid, and other chemicals

§  Methanol is a very cost-efficient way to move natural gas to higher-value foreign markets

»  U.S. is a growing methanol market §  Represents 10% of the global market §  U.S. imports 89% of its supply on average

»  Opportunity in U.S. methanol production §  Capture price spread between low-cost

natural gas and methanol §  Bolt-on approach is possible on some

existing hydrogen infrastructure

Source: Valero investor presentation, September 2013

Source: Valero investor presentation, September 2013

26

Shale Gas Development Impact on Fertilizer Market

»  Natural gas is a feedstock for ammonia production §  Represents ~70% of cash costs (CF Industries)

»  Lower gas prices directly benefit American farmers §  Increased demand for corn, soybeans has driven fertilizer costs higher §  Excess natural gas supply can be utilized to produce greater volumes

of nitrogen-based fertilizer more economically §  North American reliance on nitrogen imports means that American

producers typically run at 100% of available capacity (CF Industries)

»  Cheap U.S. natural gas means billions in investment for new domestic fertilizer plants, displacing ~11 MM m/t of imports §  Orascom/Iowa Fertilizer Company - Wever, IA §  CHS - Spiritwood, ND §  Ohio Valley Resources - Spencer County, IN §  Yara - Belle Plaine, SK Canada §  Northern Plains Nitrogen – Grand Forks, ND §  CF Industries – expansions at Donaldsonville, LA and Port Neal, IA §  PotashCorp - resumption of ammonia production at Geismar, LA §  EuroChem – Iberville Parish / St. John the Baptist Parish, LA §  Agrium – Borger, TX

»  Rush of new plant announcements sparked oversupply concerns, cancelations (Yara, Agrium-KY)

27

Looking Ahead: Natural Gas

»  Oversupply conditions expected to persist through 2020

»  Factors that could revive

demand, production, and prices (>$5/MMbtu) §  Industrial use expansions come online

over next 5 years §  Continued toughening of EPA

regulations of coal §  Historic import/export reversal of US/

Canada natural gas flows by 2014 (Marcellus gas exports to Canada), plus exports to Mexico

§  Technology advancements for increased use of CNG as a transportation fuel

§  LNG exports Source: BENTEK, September 2013

28

LNG Export Opportunity »  Political/policy battle between domestic industrial users and

producers

»  Sabine Pass, LA, Freeport, TX, Cove Point, MD now permitted for exports §  5.6 Bcf/day export capacity to come online by 2015; coincides with widening

of Panama Canal §  Represents ~8% of projected US dry gas production

»  20 additional terminal applications totaling 29 Bcf/day of export capacity pending before FERC

Source: Congressional Research Service, EIA

Selected US Natural Gas Import & Export Infrastructure

Source: Waterborne Energy Inc. Data in $US/MMBtu

29

Shale Development NGL Impacts

»  Requires fractionation facilities proximal to production §  “Y-grade” must be separated into purified products §  75% of fractionation capacity in US Gulf Coast §  Mt. Belvieu, TX major trading & storage hub §  500 Mb/d of new fractionation capacity planned for Utica §  Utica NGL production growth expected to exceed 600% between

2013-2015

»  Similar to dry gas, strong production due to fracking has resulted in oversupply and depressed prices §  Chemical industry benefits

30 Source: American Chemistry Council, May 2013

Shale Development Driving US Chemical Industry Expansion

»  Abundant ethane supplies have sparked chemical industry renaissance §  100% of captured ethane is “cracked” to make ethylene, the most basic building block in the chemicals

supply chain §  Planned expansions will increase US ethylene capacity 33% (11 MMmt) by 2017 §  Full economic impact of expansions won’t be felt until 2016

Source: EIA

31

Low Cost Feedstocks Driving US Competitiveness vs. ROW

»  USA is now the low-cost producer of ethylene-based chemicals due to abundant supplies of ethane from shale plays (up to 60% raw materials cost advantage) §  Europe, Asia reliant on oil-linked naptha as petrochemical feedstock

»  Domestic end-use of materials, i.e. plastics, will expand significantly

»  Up to 40% of new petrochemical output will be for export

Source: LyondellBasell investor presentation, September 2013

32

Natural Gas & Petrochemical Downstream Products

Feedstock/ Intermediary

Finished Products

Natural Gas, OIl

Ethane, Naphtha, etc.

Ethylene

Miscellaneous

Vinyl Acetate

Linear Alcohols

Ethyl Benzene

Ethylene Oxide

Ethylene Dichloride

High Density Polyethylene

Low-Density Polyethylene

Adhesives, coatings, textile/paper. finishing, flooring

Detergents

Styrene

Ethylene Glycol

Vinyl Chloride

House wares, crates, drums, food containers,

bottles.

Food packaging, film, trash bags, diapers, toys

PVC

Antifreeze

Fibers

PET

Miscellaneous

Polystyrene

SAN

SBR

Latex

Miscellaneous

Medical gloves, carpeting, coatings

Tire, hose

Instrument lenses, house wares

Insulation, cups

Siding, windows, frames, pipe, medical

tubing

Pantyhose, carpets, clothing

Bottles, film

33

Looking Ahead: NGLs

Source: Canadian Energy Research Institute

Source: Sunoco Logistics

»  US NGL production forecast to increase by 1.6MM b/d from 2012-2018

»  The (somewhat) hidden Condensate story

§  Used as diluent for heavy Canadian tar sands oil – critical for transportation as “Dilbit”

§  Significant investment in infrastructure being made to deliver Eagle Ford, Utica condensate to Western Canada

§  Primary delivery via pipeline, but major rail volumes ex. Utica are required to get to Midwest pipeline injection points

§  Canadian diluent import demand expected to grow from 200 Mb/d to 500 Mb/d by 2018

»  Expect export market for NGLs to expand §  Pipeline reversals undertaken to meet demand,

particularly ex. Utica to Sarnia, ON petrochemical complex and export storage and dock facilities in Philadelphia

§  US projected to export over 1MM bb/d of NGLs by 2018

Source: RBN, PLG analysis

34

Shale Development Crude Oil Impacts

»  Dramatic increases in US production due to hydraulic fracturing and horizontal drilling §  7.49 MM bbl/day §  Projected to grow by ~30% over next four years §  Strong play in Bakken; surging Permian and

Eagle Ford development §  “Tight” oil sources driving overall North American

growth §  Production forecasts frequently revised upward §  Largest area of non-OPEC growth is North

America Source: BENTEK, September 2013

35

Revitalization of US Refining Industry

»  Shale development creating competitive advantage for US refined products globally §  Strong growth for US exports to Latin America, Asia §  US now a net exporter of petroleum products §  Record 3.8MM bbl/day of exports in July 2013 §  High demand for US low-sulfur diesel in South

America and Europe

Source: Valero investor presentation, September 2013; Wall Street Journal 10/8/13

36

Driving Toward “Oil Independence?”

»  Decreasing dependency on foreign crude §  Combination of US shale plus Canadian oil sands

estimated to reduce imports to <15% by 2020

»  Supply isn’t enough – “independence” also relies on lower domestic fuels consumption §  CAFE standards the primary driver

37

Displacement of Waterborne Crudes by Mid-Continent Sources

»  Reducing imports means reducing waterborne crudes §  West African imports already down ~70% from 2010 levels

»  Mid-continent sources displacing imports at coasts, making rail critical to the total crude market §  Bakken as case study for large crude by rail operations

Source: Valero Investor Presentation, September 2013

38

Some Basic Facts About Crude Oil: Grades and Qualities

»  Not all crudes are created equal – light/sweet vs. heavy/sour §  Heavy/sour crudes include Western

Canada, Venezuela, Mexico, Alaska North Slope (ANS), Middle East (light/sour)

§  Heavy/sour has higher sulfur content, yield for asphalt, diesel

»  Refineries are generally configured to run certain types of crude §  Significant investments made ($48B

since 2005) at select refineries to install coker units that will allow processing of heavy/sour

§  Major heavy/sour refining clusters: Texas Gulf Coast, Chicago, southern Illinois, California

Source: RBN Energy

39

Some Basic Facts About Crude Oil: Major Production and Refining Areas

»  The special case of the Canada Oil Sands §  Heavy/sour crude has a natural home in Midwest and US Gulf

Coast (~2.8 MM bpd demand at USGC) §  Pipeline capacity to US Midwest refining centers is at capacity §  Pipeline expansions to coasts, US markets still 2+ years away

»  Brent, WTI, and US shale play crudes (Bakken, Permian, Niobrara, Eagle Ford) are light/sweet §  US is close to saturation point on light/sweet crude at mid-

continent and USGC refining areas

Source: CAPP, June 2013

Source: Turner Mason, RBN Energy

US Crude Oil Production Growth by Grade

Source: RBN Energy

40

US Crude Market Overview

Bakken

Oil Sands

Permian

Eagle Ford

Hardisty, AB

Clearbrook, MN

Cushing, OK

St. James, LA

Sources: EIA, PLG Analysis (Google Earth)

Brent

Mexican Maya

Venezuela Crude

West African

ANS

Brent

West African Middle East

East Coast Refiners

Pacific Northwest Refiners

California Refiners

TX Gulf Coast Refiners

LA Gulf Coast Refiners

Midwest Refiners

PADD I Demand

PADD III Demand

7,650 kbpd

PADD V Demand

2,400 kbpd

1,050 kbpd

Light/Sweet

Heavy/Sour

Light/Sweet

Heavy/Sour

Light/Sweet

Heavy/Sour

3,250 kbpd

Heavy/Sour

Light/Sweet

PADD II Demand

41

Crude By Rail From the Bakken – Recent History

»  2009-2010: Objective of crude by rail to “bridge the gap” until pipelines built §  2010-2011 discount of ~$8-12/bbl for Bakken

crude vs. peer WTI §  Undervalued due to logistics constraints

“stranding” the oil §  EOG a market leader in developing unit train

capability from the Bakken

»  2011-2012: Significant development of crude by rail loading terminals

»  2012: Crude by rail viewed as a core mode of transportation and means of arbitrage §  Differentials made rail attractive: Bakken and WTI trading at ~$12-$15/bbl less than Brent; Alberta

Bitumen trading at ~$30/bbl less than Brent §  Market response: E&P, midstream players willing to rapidly deploy significant capital to enable access

and capitalize on spreads –  Multi-modal logistics hubs in shale plays and at destination markets (i.e. Cushing, OK, St. James, LA, Pt. Arthur, TX,

Albany, NY, Bakersfield, CA) –  Lease and purchase of railcar fleets

§  Refineries installing unit train receiving capability - particularly coastal refineries previously captive to waterborne imports (i.e. Philadelphia, PA, St. John, NB, Anacortes, WA, Ferndale, WA)

42

2013: Rail Captures 70% Market Share of Bakken Production

»  Takeaway capacity now exceeds production

»  Pipelines operating below capacity; some project cancelations

»  Strong rail volumes to start the year have leveled off as of May

Source: EIA, North Dakota Pipeline Authority, PLG

~874,000 BPD July 2013

First outbound unit train shipment December, 2009

Source: North Dakota Pipeline Authority, PLG Analysis

43

Crude Oil by Rail – North Dakota Terminals

North Dakota Crude Oil Rail Loading Capacity (Barrels Per Day) Rail Terminals 2013 2014* 2015* Rail Carrier EOG Rail, Stanley, ND (Up to 90,000 BOPD) 65,000 65,000 65,000 BNSF

Inergy COLT Hub, Epping, ND (Q2 2012) 120,000 120,000 120,000 BNSF

Hess Rail, Tioga, ND (Up to 120,000 BOPD) 60,000 60,000 60,000 BNSF

Bakken Oil Express, Dickinson, ND 100,000 100,000 100,000 BNSF

Savage Services, Trenton, ND (Q2 2012 Unit Trains) 90,000 90,000 90,000 BNSF

Enbridge, Berthold, ND (Q4 2012) 80,000 80,000 80,000 BNSF

Great Northern Midstream, Fryburg, ND (Q1 2013) 60,000 60,000 60,000 BNSF

Musket, Dore, ND (Q2 2012) 60,000 60,000 60,000 BNSF

Plains, Ross, ND 65,000 65,000 65,000 BNSF

Global/Basin Transload, Zap, ND (Estimate Not Confirmed) 40,000 40,000 40,000 BNSF

BNSF Total Capacity 740,000 740,000 740,000

Plains - Van Hook, New Town, ND 65,000 65,000 65,000 CP

Dakota Plains, New Town, ND 30,000 80,000 80,000 CP

Global Partners, Stampede, ND 60,000 60,000 60,000 CP

CP Total 155,000 205,000 205,000

Various Sites in Minot, Dore, Donnybrook, and Gascoyne 30,000 30,000 30,000

Total Crude Oil Rail Loading Capacity 925,000 975,000 975,000

*Project still in the review or proposed phase Year End System Capacity

Source: North Dakota Pipeline Authority (September 2013), PLG Analysis

44

North Dakota Class I Railroads and Crude Oil Terminals

Map by PLG Consulting 44

45

Bakken Area Outbound Pipelines

45

North Dakota Crude Oil Pipeline Capacity (Barrels Per Day) Pipelines 2013 2014* 2015* Butte Pipeline 160,000 160,000 160,000 Butte Loop (Late 2014) - 110,000 110,000 Enbridge Mainline North Dakota 210,000 210,000 210,000 Enbridge Bakken Expansion Program (Q1-11/Q1-13) 145,000 145,000 145,000 Plains Bakken North (Up to 75,000 BOPD) 50,000 50,000 50,000 High Prairie Pipeline* - 150,000 150,000 Enbridge Sandpiper* (Q1 2016) - - - TransCanada Keystone XL* (2015) - - 100,000

Hiland Partners Double H Pipeline (Q3 2014, Up to 100,000 BOPD) 50,000 50,000 Pipeline Total 565,000 875,000 975,000 *Project Still in the Review or Proposed Phase Year End System Capacity

Source: North Dakota Pipeline Authority, September 2013

46

Bakken Production vs. Total Takeaway Capacity: 2013–2015 Projection

Year

ND Production Forecast (Bpd)

Pipeline Capacity

Rail Terminal Capacity

Rail Carrier Capacity

ND Refinery Consumption

Total Outbound &

Refinery Capacity

Excess Logistics Capacity

2013 850,000 565,000 925,000 1,300,000 68,000 1,558,000 708,000

2014 980,000 875,000 975,000 1,300,000 68,000 1,918,000 938,000

2015 1,150,000 975,000 975,000 1,350,000 108,000 2,058,000 908,000 Source: North Dakota Pipeline Authority (September 2013) , PLG Analysis Bpd = Barrels per Day

47

Crude Oil by Rail vs. Pipeline

$6.50

$12.00 $10.50

$15.00

$-

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

Pipeline to Cushing

Rail to Cushing

Pipeline to Pt Arthur

Rail to Pt Arthur

Dol

lars

Per

Bar

rel

Source: PLG analysis

»  Rail cost: 50-100% more expensive than pipeline transport

»  Near-term offsetting rail advantages: §  Site permitting, construction much faster §  Lower capital cost §  Scalable §  Shorter contracts (2-3 year commitments vs. 10

years for pipeline) §  Faster transit times §  Access to coastal areas not connected via pipeline §  Origin/destination flexibility §  Primary advantage: Tool of arbitrage for trading

desks

»  Rail pricing drivers §  Advantaged rate structures for first-movers,

volume, and unit train operators §  “Floor” has been set for crude by rail pricing §  Crude price differentials more important than cost

vs. pipeline §  Destination flexibility

Cost Comparison: Bakken to Cushing and USGC

48

All Crude Handled by Railroad Volume Growth

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Car

load

s

Quarterly Data

BNSF

UP

CPRS

NS

CSXT

CN

KCS

STCC 13111 Source: US Rail Desktop

49

Source: CAPP Report, 2013

Crude Oil Pipelines: Existing and Planned

»  Current pipelines ex. Bakken operating below capacity §  However, volumes have

increased over past 60 days

»  Pipeline industry has been challenged by new dynamic NA oil market §  Fixed routes, long lead times §  10 year commitments required

for new build pipeline projects §  Lack of subscription interest in

KM Freedom project (Permian-California)

»  Several natural gas pipeline conversions planned §  Trunkline (ETP) – Patoka, IL-

St. James, LA §  Energy East (TransCanada) –

Hardisty, AB-St. Johns, NS

50 50  

Crude Tank Car Market Conditions

»  Potential bottleneck: Railcars §  Current order backlog runs to early 2015 (~48,000 cars) §  Major purchases by oil majors and midstream companies §  Extremely tight market with very high lease rates §  Current crude fleet of ~30,000 cars equivalent to ~1-1.5 MM bbl/

day §  Short term demand is highly dependent on WTI – Brent spread

»  Railcar type is important §  General service 31,800 gallon capacity, non-coiled, non-

insulated cars are optimized for light crudes exclusively §  Coiled and insulated cars with 25,500 – 28,800 gallon

capacities offer multiple product flexibility for light or heavy crude and many other chemical and oil products –  Coiled and insulated cars have many redeployment options if not

in crude oil service

»  Key question: If/is/when will the crude tank car industry become overbuilt?

Source: GATX, PLG analysis

51

Forecast of Crude Railcar Supply and Demand

»  Production increases vs. railcar capacity increases §  Current crude fleet ~30k cars and

backlog of ~48.2k runs through mid 2015

§  If pipelines and local refining can consume production increases in Permian and Eagle Ford, crude by rail will be primarily Bakken and Canadian Oil Sands-driven

»  Under best-case scenario for rail market share capture, data suggests existing & planned tank car fleet exceeds demand

»  Possible retrofit of “old design” railcars would decrease capacity §  Approx. 2/3 of unlined, 30K/gallon

fleet would need retrofit

Sources: CAPP, AAR, NDPA, GATX, and PLG analysis

Assumptions: •  80% of projected Williston Basin production •  80% utilization of Oil Sands announced 300 kbpd of rail terminals through 2014, and 80% utilization of an additional 300

kbpd for 2015 •  30,000 crude railcars in March and build rate of 21,500 railcars/year through 2015 with attrition rate of 7,800 railcars/year •  700 bbl. average railcar capacity and average 23 day turn •  Other production sources increase at rate of 2% per quarter

0

500

1,000

1,500

2,000

2,500

Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15

Thou

sand

bbl

s/da

y

Best-Case Crude by Rail Potential vs. Crude Railcar Capacity

Other Production Sources Williston

Oil Sands Crude Railcar Capacity

Railcar backlog is through mid 2015; retirement of old railcars will reduce capacity if no additional railcars built

Q1 2013 originated rail carloads of crude petroleum were 97,135, which equates to 755,000 barrels per day (assume 700/bbl. average capacity)

52

Lac Megantic Investigation Results – Update

»  Montreal, Maine and Atlantic Railway (MMA) filed for Chapter 11 bankruptcy on August 7 and had its Canadian rail operating license suspended on August 13

»  Transport Canada will review adequacy of rail carrier insurance requirements in light of the estimated $200+ million estimated damages

»  MMA insurance level was $25 million vs. industry average of $32 million

»  September: Transportation Safety Board of Canada finds World Fuels Newtown, ND misclassified the crude oil; Irving Oil and World Fuels have been cited with potential criminal impacts §  Ten oil producers delivered oil into Newtown, ND terminal with

MSDS’s showing varying determinations on flash and boiling point tests

§  Newtown described the product in the cars as the lowest level hazard class & volatility/flammability level, when in fact it contained some much more volatile crude oils

§  TSB has concluded that the crude oil shipped was as flammable as gasoline

53

Rail Operations – Impacts on Canadian Railroads

»  July 24: Transport Canada announces the following measures for Canadian railroads §  Two man crews are required on all trains

transporting hazardous materials (hazmat) cars §  No locomotive attached to hazmat cars will be

left unattended on a main track §  All unattended locomotives on main tracks are

protected from unauthorized entry §  Directional controls must be removed from any

unattended locomotives on main and siding tracks

§  Hand brakes must be applied to all locomotives attached to cars that are left unattended for more than one hour on a main or siding

§  Automatic and independent brakes must be applied to all locomotives attached to cars and left unattended for one hour or less

54

Rail Operations Impacts – US Rail Carriers

»  August 2: FRA – emergency order issued to US railroads §  No unattended hazmat trains outside yards §  Railroads must develop process for securing unattended hazmat trains §  Number of handbrakes applied to unattended train must be communicated §  Railroads must inspect train after an emergency response occurs §  Short lines are subject to compliance with the emergency order

55

FRA Crude Oil Product Quality and Classification Initiative

»  FRA is investigating and put shippers on “notice to evaluate their processes” §  Improved and frequent crude oil chemistry testing to

determine volatility and appropriate MSDS and classification

§  Shippers must use only the proper tank car/vessel that meets hazmat regulation requirements

§  Establishes minimum tank car outages and recommends product specific gravity testing prior to car loading

§  Concern is with product expansion and leaks en route §  Expressed concern about corrosion resulting from oil

chemistry unknowns and recommends testing for corrosion agents

»  PHMSA (Pipeline and Hazardous Materials Safety Administration) initiates “Bakken Blitz” to test product samples vs. BOL description for accuracy

56

Potential Future Rail Industry Impacts

»  Bakken Crude oil volatility testing (FRA Directive) §  Oil chemistry varies by well/pad §  Concerns with extremely low flash and boiling points §  Highly volatile crudes may require post 2011 type tank cars

»  Short line operations/rules changes – safety vs. economics §  Vetting process for small operators – shipper responsibility §  Higher insurance level requirements likely

»  DOT 111A Car type §  New cars –  Crude oil 111A car design, will it be safe enough?

§  Likely yes

§  Existing 111A fleet of 240,000 cars – to be determined –  Retrofits for certain high hazmats? –  Fleet grandfather provisions? –  Tank car shop capacity concerns

§  Crude oil corrosion concerns – under investigation –  Potential car lining if tank corrosion is evident

57

Lac Megantic Incident is Changing the Crude by Rail Business

»  Increased product testing, documentation and traceability

»  Increased FRA audit and scrutiny of entire CBR supply chain

»  Railroad operating rule changes on hazmat train handling

»  Increased financial responsibility minimums for short line carriers

»  Pre-2011 flammable liquid tank car fleet will be impacted (ethanol and crude oils) §  Estimate two-thirds of fleet

58 58  

Shale Development and Crude By Rail: Current Market Dynamics

»  The gusher of new US light/sweet shale oil production made possible by fracking has upended the traditional oil logistics and trading patterns §  Result: “Wrong place/wrong oil” supply displacements, i.e.

Cushing overflow §  Rapid investment in new logistics infrastructure, routes,

modes, and terminals (“re-plumbing”)

»  Bakken now sufficiently developed; next immediate areas for significant investment are Utica, Oil Sands, Permian, coastal areas and and facilities that support bitumen transport in particular §  Est. 500M bbl/day rail loadout capacity being developed in

Oil Sands §  Rail build-out/additional takeaway capacity has helped

Alberta heavy/sour reach highest price in 5 years ($91/bbl)

»  Today: §  Spreads have narrowed, limiting arbitrage opportunities

and slowing crude by rail growth §  Price differentials driving trading and logistics patterns

58 Source: North Dakota Pipeline Authority, RBN Energy – September 2013

59

Oil Sands

Hardisty, AB

Heavy/Sour Crude Logistics and Price Differentials – October 2013

$69

Heavy/Sour at TX GC Mexican Maya (ship): $101 WCS (pipe): $87 WCS (rail): $93

Crude Prices from October 2013 Sources: EIA, CME Group, PLG analysis (Google Earth) 59 Mexican Maya

Marine

PADD III Demand

7,650 kbpd

PADD V Demand

2,400 kbpd Light/Sweet

Heavy/Sour

Light/Sweet

Heavy/Sour

3,250 kbpd

Heavy/Sour

Light/Sweet

PADD II Demand

TX Gulf Coast Refiners

Pacific Northwest Refiners

California Refiners

Midwest Refiners

Rail Pipeline

Clearbrook, MN

Chicago, IL

Spread Dec. 2012 October 2013 Change Mexican Maya - WCS $33.55/bbl $31.50/bbl -$2.05/bbl

60

Light/Sweet Crude Logistics and Price Differentials – October 2013

Bakken

Permian

Eagle Ford

East Coast Refiners

Pacific Northwest Refiners

California Refiners

TX Gulf Coast Refiners

LA Gulf Coast Refiners

$6

Light/Sweet at TX GC Bakken (pipe): $104 Brent (ship): $112 WTI (pipe): $109

Light/Sweet at PNW Bakken (rail): $106 Brent (ship): $112

Light/Sweet at EC Bakken (rail): $108 Brent (ship): $111

Light/Sweet at LA GC Bakken (rail): $108 LLS (local): $106

Brent

ANS

Brent

60

Crude Prices from October 2013 Sources: EIA, Bloomberg, Baytex Energy, CME Group, PLG analysis (Google Earth)

PADD I Demand

PADD III Demand

7,650 kbpd

PADD V Demand

2,400 kbpd

1,050 kbpd

Light/Sweet

Heavy/Sour

Light/Sweet

Heavy/Sour

Light/Sweet

Heavy/Sour

Marine

Rail Pipeline

Cushing, OK

Chicago, IL

Clearbrook, MN

St. James, LA

$93 (wellhead)

WTI:$103

Spread Dec. 2012 Oct. 2013 Change Brent - WTI $21.83/bbl $6.65/bbl -$15.18/bbl LLS - WTI $20.00/bbl $2.50/bbl -$18.50/bbl WTI - Bakken (Clearbrook) $3.00/bbl $10.00/bbl $7.00/bbl

61 61  

Looking Ahead: North American Crude Oil Logistics

»  A “new normal” in crude oil flows will emerge in conjunction with continued North American oil production over the next five years §  Continued shifts of mid-continent light/sweet to coastal destinations §  New modes and infrastructure to get Canadian bitumen to USGC, with or without

Keystone XL §  Permian, Eagle Ford to meet USGC light/sweet demand; Bakken flows primarily

east-west §  Significant oversupply of light/sweet and super-light grades §  Continued major investments in midstream logistics operations and assets

»  Expect eventual government approval of light/sweet crude oil and condensate exports on a limited basis, similar to LNG

»  Primary threats to crude by rail business 1.  Narrow WTI-Brent spread (less than $10/bbl) 2.  Glut of Permian and Eagle Ford light sweet oil displacing rail volumes to USGC

to Gulf Coast (but somewhat offset by new rail deliveries from Oil Sands) 3.  Continued pipeline development 4.  Water-borne Eagle Ford crude deliveries to USEC Key

Drivers

Supply Sources

Oil Prices

Destination Markets

Capital

62

Looking Ahead: Crude Oil Anticipated Production Growth and Product Flows

Sources: BENTEK Energy, CAPP, Railroad Commission of Texas, ND Pipeline Association, PLG Analysis (Google Earth)

= Current 2013 = Future 2017

Anticipated Production Growth (000 bbl/d)

Permian 1,680 1,200 +40%

1,600 800 Eagle Ford

+100%

Bakken +56% 871

1,363

Marine

East Coast Refiners

Oil Sands

2,590 1,985 +30%

Hardisty, AB

Cushing, OK

LA Gulf Coast Refiners

Light/Sweet

St. James, LA

Rail Pipeline

Pacific Northwest Refiners

California Refiners

TX Gulf Coast Refiners

Heavy/Sour

Clearbrook, MN

Chicago, IL

Canadian East Coast Refiners

Export Terminal

62

63

Thank You! For follow up questions and information, please contact PLG:

+1-312-957-7757 / info@prologisticsgroup.com

Taylor Robinson, President

Graham Brisben, CEO

Jean Arndt, Vice President

Jeff Dowdell, Senior Consultant

Gordon Heisler, Senior Consultant

Jeff Rasmussen, Senior Consultant

Jay Olberding, Analyst

This presentation is available at: WWW.PLGCONSULTING.COM

Professional Logistics Group