Crude: Resources, Regulations & Railcars Prepared for: June - PowerPoint PPT Presentation

Engineering Supply Chain Logistics Crude: Resources, Regulations & Railcars Prepared for: June 17, 2014

About PLG Consulting Partial Client List 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 2 Crude: Resources, Regulations & Railcars

What is behind the North American energy revolution? Recoverable Resources & Continuous Energy Revolution Enabling Improvement Technologies • Evolving exploration • Product abundance… Resources • N.A. shale plays and production overabundance technologies • Western Canadian • Imports displaced… • Tremendous oil sands exports grow productivity gains • Recoverable resources Technologies examples drives cost reductions grow…sustainability • Hydraulic fracturing • Logistics infrastructure • Globally competitive • Horizontal drilling “re -plumbing ” in power and material progress • Steam Assisted cost structure Gravity Drainage • Manufacturing (SAGD) industries grow/return to North America 3 Crude: Resources, Regulations & Railcars

Unconventional Energy Resources North America Shale Western Canada Oil Sands Source: CAPP, About Oil Sands, June 2013 Source: EIA, May 2014   New production technology developed by small Multi-billion dollar capital investments required by entities allowing numerous players few players   “Mass production” methodologies developed Production process will harvest oil over long term 4 Crude: Resources, Regulations & Railcars

Shale Technology Introduction Convergence of hydraulic fracturing and horizontal drilling in last five years  Fracking first used in 1947  Revolutionary advances since 2009  Yields 3-10x the initial production rate of conventional wells US uniquely positioned for the techniques  Private mineral rights  Drilling intensity (wells per acre)  90% of rig fleet equipped for horizontal drilling  Location of shale plays Rapid ROI for E&P companies GAS OIL THERMAL  Typical well earns back capital cost in 1-2 years  Depending on play productivity, “break even” price of ~$65/bbl (WTI) for oil and $3.50/Mbtu for gas  Liquid plays providing highest returns currently and a majority of drilling rigs are focused on liquids  Oil / Gas rig count split at ~80% / 20% from ~20% / 80% five years ago Source: Baker Hughes 5 Crude: Resources, Regulations & Railcars

New Fracking Techniques Drive Increased Production At Lower Costs More well bores per well pad  Directional bores to multiple shale layers  Reduced well spacing per acreage – increases well density  Zipper wells – stimulating two wells in tandem Optimal lateral lengths  Lateral lengths had tripled since the start of horizontal drilling, but this trend is being challenged by new practices Zone fracturing  Micro-fracture testing at multiple points vs. one average test Source: Marathon, February 2014 that enables highest extractions of each zone Shorter, fatter fractures  Bigger holes in casing combined with additional sand and water use Productivity gains continue!  Time required for drilling 15,000+ ft. well cut in half in last two years (9 days vs. 18 days)  Eagle Ford example – new well oil production per rig has increased by 150% over past 3 years  Lowers break even costs drive profitability improvements Source: EIA Drilling Productivity Report, May 2014 6 Crude: Resources, Regulations & Railcars

Oil Sands Production Processes Oil (bitumen) recovery uses two main methods Mining - 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 Drilling - SAGD  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 Source: www.epmag.com 7 Crude: Resources, Regulations & Railcars

Shale Supply Chain and Downstream Impacts Direct Downstream Inputs Wellhead Thermal Fuels Raw Materials Output Products All Manufacturing Generation Steel Gas Process Feedstocks Fertilizer (Ammonia) Proppants Home Heating Methanol (Propane) OCTG NGLs Other Fuels Feedstock (Ethane) Chemicals Chemicals Byproduct (Condensate) Water Petroleum Products Cement Petro-chemicals Crude Other Fuels Gasoline 2010 onward RAIL INDUSTRY DEMAND 2016 onward 8 Crude: Resources, Regulations & Railcars

U.S. Frac Sand Industry Trends Rapid growth and maturation of both industries Total Delivered Cost per Ton ~ $122 (hydraulic fracturing and sand production) over the past 5 years Destination Sand supply base growing and consolidating at Transload & Sand Trucking the same time 33% 25%  Mines continue to open; supply base is consolidating  Large fluctuations in price of sand based on Rail - Freight, FSC supply/demand balance and Eqp Lease 42% Significant production growth beyond WI in IL and MO due to new demand for 100 mesh sand Unit train shipping is the game-changing logistics development – spurring investment in larger load-out sand transload facilities Logistics costs drive ~ 67% of total “Benchmark” high -efficiency unit train example – Illinois delivered sand cost to South Texas  Single-line haul (one rail carrier), private railcars achieving two round trips per month, origin sand facility has direct rail load-out and Source: PLG analysis using BNSF public pricing – does not include fixed assets at origin or destination trucking is less than 100 miles destination, December 2013 9 Crude: Resources, Regulations & Railcars

Shale Gas History and Future Demand Gas production has increased over past five years rigs Bcf/d Rig Count with Natural Gas Production with a significantly lower gas rig count 2,500 80 70  2,000 1,000 rigs at peak down to ~300 rigs 60  Drilling productivity continues to increase production per well 50 1,500 and lower costs 40 1,000  30 And the Liquids (Crude, NGL) wells produce dry natural gas as a 20 by-product 500 10 Abundant US gas recoverable reserves 0 0  Low cost reserves in accessible locations near population  Marcellus gas production is the “eighth largest country” already Gas Oil U.S. Natural Gas Production Source: Baker Hughes, EIA, PLG Analysis, June 2014  US will become a net gas exporter by 2020 US gas demand will grow due to:  Coal-fired generation plant converting to gas  More industrial use – steel, fertilizer, methanol  Mexican export via pipeline and LNG export overseas  Increasing use as transportation fuel US gas cost competitiveness is sustainable  Supply will overwhelm demand as prices approach $5  US government and capital constraints will likely limit LNG export to protect US from world gas market price Source: RBN Energy, January 2014 10 Crude: Resources, Regulations & Railcars

Overabundance of NGLs Will Grow 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 Source: IHS Energy Source: IHS Chemical, September 2013 11 Crude: Resources, Regulations & Railcars

Shale Gas Phased Impact To NA Industrial Renaissance 2008 2010 2012 2014 2016 2018 2020 Phase III – “Manufacturing”: Raw material cost driven Phase II - Downstream Products: Resins, Chemicals SHALE GAS Phase I - Gas & Power-intensive Industries: BOOM Steel, Fertilizer, Methanol >$100B of Chemical Expansion Phase I – Industries using gas as primary Announced 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 Source: American Chemistry Council, February 2014 12 Crude: Resources, Regulations & Railcars