understand risk innovate solutions execute...
TRANSCRIPT
Understand Risk
Innovate Solutions
Execute Safely
Alternative Shipping Perspectives Presented by:
Jarrett Zielinski
President & CEO of TORQ Energy Logistics
2
Summary Crude By Rail
• CBR has proven itself to be a cost-effective, rapidly-deployable, attractive transportation solution for upstream producers
and downstream consumers
• North American CBR volume has surged more than 50-fold since 2009, currently transporting nearly 700,000 bbl/day
– Growth was led by development primarily in the Bakken play
– Canada has lagged the U.S. by ~12 to 24 months, but has witnessed tremendous growth in 2012
Tremendous Growth of CBR
U.S. and Canada Originated CBR Carloads
Source: Equity research.
3
Significant Increase in CBR Infrastructure Investment
• Significant capital is being invested in CBR including upstream loading and downstream unloading terminals
• Terminal investments are quickly evolving from small-scale pilot facilities to large-scale commercial facilities capable of handling multiple unit trains
Significant Increase in Infrastructure Spending to Support CBR Growth
Note: All capacity figures denoted in ‘000s bbl/d.
Source: Equity research and company reports.
4
CBR Infrastructure Investment
‘000s b
bl/d
‘0
00s b
bl/d
‘000s b
bl/d
‘000s b
bl/d
‘000s b
bl/d
‘000s b
bl/d
5
Rail Infrastructure Capable of Handling Increased Volumes (Cont’d)
• Infrastructure investment into transloading loading and off-loading capability has been substantial in the last several years
CBR Infrastructure Investment
Transloading Facilities and Capacity c. 20101
Source: Draft Supplemental Environmental Impact Statement – Keystone XL Project.
Transloading Facilities and Capacity c. 20131
6
Potential Long-Haul Pipeline Expansions2 Current Long-Haul Crude Oil Pipelines Out of Western Canada
Enbridge Pipelines
Other Major Pipelines
TransCanada Keystone
Kinder Morgan Express
Kinder Morgan Trans Mountain
ExxonMobil Pegasus
Burnaby
Salt Lake City
Edmonton
Hardisty
Houston
Montreal Clearbrook
Western
Corridor
Platt Express
Keystone
Rangeland
Spearhead Mustang
Cushing
St.Paul
Enbridge Mainline
Anacortes
Kitimat
Port Arthur
Guernsey
Flanagan
Sarnia
Chicago
Wood
River Ponoka
Company Pipeline Route Capacity
(bbl/d)
Enbridge Enbridge System Edmonton / Hardisty, AB to Flanagan, IL
/ Toledo, OH / Sarnia, ON
2,320,000
TransCanada Keystone Hardisty to Wood River / Patoka, IL and
Cushing, OK
591,000
Kinder Morgan Trans Mountain Edmonton to Burnaby, BC 300,000
Kinder Morgan Express Hardisty to Wood River, IL 280,000
Plains All American Rangeland Sundre, AB to Guernsey, WY 83,000
Inter Pipeline Bow River Hardisty to Milk River, AB 30,000
Total 3,604,000
Current Pipeline Capacity1 Planned Long-Haul Crude Oil Pipelines Out of Western Canada1
Company Pipeline Expected Start-up Capacity
(bbl/d)
Enbridge Mainline Expansion 1 2014 120,000
TransCanada Keystone XL 2015-16 830,000
Enbridge Mainline Expansion 2 2015 230,000
TransCanada Mainline Conversion 2017-18 800,000
Kinder Morgan TMX Expansion 2018-2019 590,000
Enbridge Northern Gateway 2017+ 525,000
Total 3,095,000
1 Source: Equity research and company reports. 2 Source: Canadian Association of Petroleum Producers.
Pipeline Infrastructure for
Canadian Crude Oil Exports
Source: Company reports, Canadian Association of Petroleum Producers and Equity Research. 1 Enbridge Mainline Expansion 1 – Current: Received regulatory approval.
2 TransCanada Keystone XL – May 2012: A new Presidential Permit application was filed. September 2012: Submitted an environmental report to the Nebraska Department of Environmental Quality. January 2013:
Revised route was supported by the Governor of Nebraska. Current: The U.S. Department of State is continuing its review and will issue a final EIS followed by the national interest determination. 3 Enbridge Mainline Expansion 2 – January 2013: Announced further expansion of the Canadian mainline system which involves increased pumping horsepower. Current: Preparing regulatory application. 4 TransCanada Mainline Conversion – April 2013: Held a binding Open Season that ran from April 15, 2013 to June 17, 2013. Current: Reviewing Open Season results followed by the preparation of the regulatory
application for the NEB (if the Open Season is determined to be successful). 5 Kinder Morgan TMX Expansion – May 2013: Received approval of its tolling methodology and principles. Current: Plan to submit a facilities application with the NEB in the fall of 2013. 6 Enbridge Northern Gateway – May 2013: NEB public hearing concluded. June 2013: Final oral arguments for the project were heard. Current: The Regulator will issue its recommendation on the project by December
29, 2013 with a final decision to be made by the Governor in Council.
Crude Oil Production vs.
Pipeline Takeaway Capacity
• Even if all proposed pipelines were built, takeaway needs from Western Canada are still forecast to significantly exceed
pipeline capacity by 2020
• If no new proposed pipelines are built by 2020, production would exceed pipeline capacity by ~5 MMbbl/d
Pipeline Constraints Have been Favorable for CBR
Western Canada Crude Exports and Pipeline Capacity
7
-
2.0
4.0
6.0
8.0
10.0
2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Pro
du
cti
on
(M
Mb
bl/d
)
Total Exisitng Capacity Mainline Expansion 1
TransCanada Keystone XL Enbridge Mainline Expansion 2
TransCanada Mainline Conversion Kinder Morgan TMX Expansion
Enbridge Northern Gateway Risked West Can Crude Exports (CIBC Est.)
Unrisked West Can Crude Exports (CIBC Est.)
1
2 3
6
4 5
Excess production
with no new
proposed pipelines:
5 MMbbl/d
Not
Appro
ved
A
ppro
ved
or
In P
lace
8
North American shale oil production has “boomed” in recent years
• In the United States, production growth has been relatively concentrated from the Eagle Ford and the U.S. Bakken
– Eagle Ford production growth has led the charge with ~340,000 bbl/d of growth1 (~100% y-o-y growth)
– Additional growth has come from the U.S. Bakken with ~240,000 bbl/d of growth (~50% y-o-y growth) and the Permian Basin with ~186,000 bbl/d
of growth (~17% y-o-y growth)
• In Canada, growth has been relatively widespread
– The Saskatchewan Bakken stands out as having been the biggest growth contributor, although this has been outshone by the Cardium in recent
history
-
100
200
300
400
500
600
700
Pro
du
cti
on
(Mb
bl/d)
Montney - Gas Montney - Oil Deep Basin Hz Horn River
Bakken Duvernay Shaunavon Cardium
Viking Amaranth Glauconite Nikanassin
Montney Oil
Bakken
Cardium
Viking
CarbonatesSeal
Canadian Tight Oil Production by Play U.S. Oil Production by Play
-
250
500
750
1,000
1,250
1,500
1,750
2,000
2,250
2,500
2,750
3,000
Pro
du
cti
on
(M
bbl/d)
Granitewash Niobrara
Permian Mississippi Lime
US Bakken Emerging Plays
Woodford Barnett
Fayetteville Haynesville
Marcellus PA Eagleford Permian
U.S. Bakken
Eagleford
Shale Oil Growth
1 Wellhead liquids only (excludes processed NGLs).
9
Canadian Production is Forecasted to Continue to Increase
• Future oil production forecasts vary greatly between sources
– The Canadian Association of Petroleum Producers (“CAPP”) forecasts Western Canadian conventional oil production in
2020 of ~1.4 MMbbl/d, while some equity research estimates are more aggressive with oil production forecast for ~1.7
MMbbl/d
• The majority of Canadian oil production growth is driven by Oil Sands
– CAPP forecasts oil sands growth to 2.6 MMbbl/d in 2016, moving to 3.4 MMbbl/d by 2020
– Corporate targets however, forecast growth to 5.0 MMbbl/d by 2020
Oil Sands Growth Forecast Onshore Canadian Oil Production (Non-Oil Sands)
-
1.0
2.0
3.0
4.0
5.0
6.0
2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
To
tal
Pro
du
cti
on
(M
Mbbl/d)
Producing Construction ApprovedSubmitted Disclosed CAPP TotalUnrisked Forecast
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Pro
du
cit
on
(M
bbl/d)
Non Resource Play Oil Production Resource Play Oil Production
Cardium Shaunavon
Bakken CAPP Forecast
Historical Forecast
Source: Equity research and company reports.
Production Profile Growth
10
Introduction to Crude Gravity and Type
• The American Petroleum Institute (API) measures the “weight” or quality of crude oil
on the API gravity scale. On this continuum, higher gravity equals lighter oil
• Light Oil
– Flows easily through wells / pipelines and can be refined into a large
quantity of transportation fuels (gasoline, diesel, jet fuel)
– Less viscous (heating not required for transport)
– Best suited for pipeline transportation
• Heavy Oil
– Very carbon-rich and requires additional pumping in order to flow it
through wells and pipelines
– More complex refining process is required and generates fewer natural
gasoline and diesel fuel components
– Can be mixed with lighter oils to fit refinery specifications
• Bitumen
– Semi-solid hydrocarbon mixture
– Either diluted (blended) with condensate to produce diluted bitumen (dilbit,
railbit), or upgraded (chemical process involving the addition of hydrogen /
removal of carbon) to create Synthetic crude
– Most viscous (heating or diluent required for transport)
Source: Crude Monitor, Equity research, American Petroleum Institute. Crude Prices as of July 9, 2013.
Light Oil / Synthetic Includes Light Louisiana Sweet (LLS), West Texas Intermediate
(WTI), Edmonton Par, Synthetic, Brent
Brent $108.00 vs. Ed. Par $106.00
Medium Includes Midale, Mixed Sour Blend, Peace River Sour
Heavy Includes Bow River North, Bow River South, Fosterton, Lloyd
Blend (LLB), Lloyd Kerrobert (LLK), WCS, Cold Lake, Blended
Bitumen
Maya $91.50 vs. WCS $77.90 and Bow River $77.15
Extra-Heavy / Bitumen
45.4˚
31.1˚
30.2˚
22.3˚
21.5˚
10.0˚
0.1˚
6.5˚
Le
ast V
isco
us
Mo
st
Vis
co
us
111 Crude Oil Profiles
11
Canada and U.S. Market Demand1 (Mbbl/d)
1 Source: CAPP, CA Energy Commission, EIA and Statistics Canada. 2 Source: CAPP.
North American Crude
Oil Demand Profile
12
Destinations
Destinations Exist for CBR
• The Midwest region is currently Canada’s largest market due to its close proximity, large size and established pipeline network
• Market penetration to U.S. coasts is still limited, but refiner interest remains strong
– Large refiners in PADD III (U.S. Gulf Coast) continue to add heavy oil refining capacity, processing more expensive waterborne crudes,
primarily Maya
– Producers and refiners that ship by rail can take advantage of Brent-linked pricing by railing directly to the Gulf Coast
• Imports from Venezuela, Mexico, Columbia and Brazil account for collectively 88% of all heavy imports into the region
– Mexican and Venezuelan production continue to decline, creating room for increased Canadian oil demand
US Imports of Heavy Oil (<27 API) Canadian Heavy Oil (<27 API) Imports by PADD
1 Source: EIA, CAPP.
13
Multiple Potential Destinations Exist for CBR (Cont’d)
• Rail transportation is employed to take advantage of regional price differentials
• CBR allows producers and marketers to send oil to the highest price area
• It is difficult for smaller producers to secure credit for the long-term take-or-pay pipeline commitments required to pipeline oil cost-effectively
– Short term pipeline tolls can be prohibitively expensive
• Gulf Coast refineries equipped for heavy oil will be able to utilize cheaper domestic oil, pushing out heavier imports from Mexico, Venezuela and Saudi
Arabia
• PADD I and PADD V are currently not pipeline connected
– As Alaskan production declines, PADD V will need further domestic production that is providable by rail
– Eastern imports of water-borne crudes will be replaced by cheaper domestic production
• Coker capacity throughput (ability to process heavy oil) is most evident in PADD III, but growing in PADD II and PADD I
Source: EIA: Refinery Capacity Report June 2013.
U.S. Coker Capacity
40%
94%
90%
79%
87%
74%
90%
89%
73%
84%
-
200
400
600
800
1,000
1,200
1,400
1,600
11 12 13 11 12 13 11 12 13 11 12 13 11 12 13Cru
de O
il V
olu
me (
Mbbl/d
)
Throughput Capacity
PADD I PADD II PADD III PADD IV PADD V
Coking Capacity
Summary Crude By Rail
• Ability to access many different markets from the same load point and flexibility to switch final destination on relatively short notice
• Speed to market (5-10 days for rail vs. 30-50 days for pipe)
• Shipping heavier bitumen by rail can be less expensive than pipe, depending on viscosity and the amount of diluent required
• Improved overall economics as CBR allows the flexibility to ship to refineries with highest prices for specific crude types
• Expansion of capacity can be achieved quickly and is relatively inexpensive when compared with pipe
• Intermediate and junior producers are unable to commit to long term take-or-pay pipeline tolls required to transport oil through a pipeline in
a cost-effective manner; CBR provides them with a flexible, cost effective alternative
14
Comparative Transportation Features – Rail vs. Pipeline
Selection Attributes Railroad Pipeline
Market Access / Optionality Diverse; Flexible; On-Demand Less flexible; Requires Long-Term Commitments
Capital Investment Required Low Very High
Development Lead Time Low High
Speed to Market Quicker (5 - 10 days) Slower (30-50 days)
Product Quality Retention High (complete separation) Low (dilution, trans-mixing)
Backhaul Opportunities High (diluent option) Limited (10-20 year fixed commitments)
Scalability High (start manifest; grow into unit) None
Existing Infrastructure Plentiful (existing rights of way) Limited (or full)
Economic Proposition Improved (overall cost plus differential) Constant (take-or-pay)
Source: Association of American Railroads (AAR), Surface Transportation Board (STB), street research and Torq.
Advantages of CBR To Producers
Specific Gravity KG/Gallon 0.993 0.966 0.921 0.871 0.835
Crude Density API 11˚ 15˚ 22˚ 31˚ 38+˚
Barrels Per Car3
bbl/car 550 575 600 650 700
Rail Cost
Trucking $/bbl $2.65 $2.56 $2.43 $2.20 $2.14
Onloading $/bbl $1.75 $1.75 $1.75 $1.75 $1.65
Rail $/bbl $12.73 $12.17 $11.67 $10.77 $10.00
Offloading $/bbl $2.25 $2.25 $2.25 $2.25 $2.25
Car Rental ($1,500/mo) $/bbl $2.80 $2.68 $2.56 $2.37 $2.20
Total Rail Cost $/bbl $22.17 $21.40 $20.66 $19.34 $18.23
Pipeline Cost
Trucking $/bbl $2.65 $2.56 $2.43 $2.20 $2.14
Firm Cost by Pipe4
$/bbl $12.25 $12.00 $11.75 $11.50 $11.25
Diluent Source / Ship (Firm) $/bbl $10.39 $10.29 NA NA NA
Total Pipeline Cost (Firm) $/bbl $25.29 $24.84 $14.18 $13.70 $13.39
Trucking $/bbl $2.65 $2.56 $2.43 $2.20 $2.14
Interruptible Cost by Pipe4
$/bbl $17.50 $17.25 $17.00 $16.50 $16.25
Diluent Source / Ship (Interruptible) $/bbl $15.21 $15.11 NA NA NA
Total Pipeline Cost (Interruptible) $/bbl $35.36 $34.91 $19.43 $18.70 $18.39
Incremental Rail Costs (Firm)5
$/bbl ($3.12) ($3.44) $6.48 $5.64 $4.85
Incremental Rail Costs (Int.)5
$/bbl ($13.19) ($13.51) $1.23 $0.64 ($0.15)
Illustrative Differential $/bbl ($10.00) ($10.00) ($10.00) ($10.00) ($10.00)
Net Benefit (Firm) $/bbl ($13.12) ($13.44) ($3.52) ($4.36) ($5.15)
Net Benefit (Interruptible) $/bbl ($23.19) ($23.51) ($8.77) ($9.36) ($10.15)
Economic Profile of CBR
15
Transportation Economics Not As Simple as Pipeline Tolls
• Heavy oil crude by rail is more economic than light oil crude by rail
• When large differentials persist, producers receive the increased price at an alternative destination in addition to the difference in transportation
costs
• Illustrative economics presented to the right demonstrate heavy oil’s long-term advantage when compared to long-term pipeline tolls
• This advantage is compounded when compared with short term pipeline agreements which can be much more expensive than long-term pipeline
commitments (below)
Illustrative Economics For Various Crude Types1 Illustrative Heavy Oil Pipeline Costs
Source: Torq Transloading internal analysis. 1 10-20 year commitment. 2 150% of firm commitment.
3 Assuming standard GP or C&I 25,500 gallon tank car.
4 Includes destination tankage and transfer costs. 5 Denotes undiluted heavy crude in C&I tank cars.
Firm1
Interruptable2
Pipeline Transportation Costs
Pipeline Toll Field - Hardisty $/bbl Dilb it $2.25 $3.50
Pipeline Toll Hardisty - USGC $/bbl Dilb it $8.00 $12.00
Pipeline Storage $/bbl Dilb it $1.00 $1.00
Line Fill 40 days $/bbl Dilb it $1.00 $1.00
Dilbit Pipe Total $/bbl Dilbit $12.25 $17.50
70% Bitumen $/bbl Dilb it $8.58 $12.25
30% Diluent $/bbl Dilb it $3.68 $5.25
Bitumen Pipe Total $/bbl Bitumen $12.25 $17.50
Diluent cost per bbl of Bitumen $/bbl Bitumen $5.25 $7.50
Shipping cost per bbl of Bitumen $/bbl Bitumen $17.50 $25.00
Sourcing Cost
Diluent Transport Mt Belvieu - Edmonton $/bbl Diluent $10.00 $15.00
Diluent Transport Edmonton - Field $/bbl Diluent $2.00 $3.00
Total Diluent Transportation ($/bbl) $/bbl Diluent $12.00 $18.00
bbl Diluent / bbl Bitumen 0.43 0.43
Diluent Sourcing Cost $/bbl Bitumen $5.14 $7.71
Total Transport Cost $/bbl Bitumen $22.64 $32.71
Safety of CBR
Recent developments fractured public confidence and offset historically low rate of incidents for railroads:
Numerous explosive derailments:
i) Lac Megantic, QC (Bakken crude, human error, mechanical failure)
ii) Plaster Rock, NB (crude oil, propane and butane)
iii) Gainford, AB (LPG not Crude)
iv) Pickens County, Alabama (Bakken crude)
v) Casselton, ND (Bakken crude)
Review of crude types – light vs. heavy i) Light crude (i.e. Bakken) – lower flash point, greater presence of light ends (i.e. propane, butane), greater flammability
ii)Heavy crude – high flash point, less presence of light ends, lower flammability
Tank Cars
All DOT-111 tank cars built to transport Packing Groups I and II crude oil and ethanol, ordered since October 2011 adhere to the AAR Tank Car Committee’s latest standards which include:
i) a thicker, more puncture-resistant shell or jacket;
ii) extra protective head shields at both ends of tank car, and
iii) additional protection for the top fittings.
16
Safety of CBR
• Today, roughly 92,000 DOT-111 tank cars are used to
move flammable liquids, such as crude and ethanol,
with approximately 14,000 of those tank cars built to
the latest industry safety standards of 2011.
• The roughly 14,000 newer tank cars that today comply
with higher industry-imposed safety standards from 2011
also might require some upgrades.
17
Safety of CBR
18
Safety of CBR
19
Safety of CBR
• Risk in all modes of transportation
– Size of release to be considered
i) Railcar failure – higher incident rate
ii) Pipeline failure – higher spill rate
• According to an IEA study, while North American railroads
have rate of incidents from 2004 to 2012, North
American pipelines have spilled three times as much
oil as railroads over the same period.
20
Safety of CBR
SAFETY MUST REMAIN PRIORITY #1 FOR ENTIRE INDUSTRY
21
Map of Torq Transloading Terminals
22
About TORQ Energy Logistics
• Industry leader in
safety
• Total current CBR
volume from Torq
terminals: 40,000
bbl/day
• Total current
approximate CBR
volumes from
Canadian terminals:
200,000 bbl/day
• Total planned CBR
capacity of Torq
terminals: 128,600
bbl/day
• 120 truck fleet.
Unity