North American Crude By Rail Challenges and Growth Analysis - PowerPoint PPT Presentation

Engineering Supply Chain Logistics North American Crude By Rail Challenges and Growth Analysis Prepared for: Indianapolis, IN September 11, 2014 1

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  Institutional investors North American Crude By Rail Challenges and Growth Analysis 2

PLG’s Crude By Rail Industry Qualifications Deep rail industry experience Diverse projects   Operational CBR supply chain optimization   Commercial Rail commercial negotiations   Design & engineering Rail car acquisition – commercial & technical inspection   Equipment market Comprehensive design & engineering – rail, marine, tankage, product handling, and related facilities Broad CBR industry client experience over  EH&S training past 3 years  Investment advising  E&P companies  Industry’s only long term, CBR volume forecast with  complimentary rail tank car forecast Refiners  Terminal developers Recognized industry thought leader on CBR  Investors – private equity, hedge funds, investment and tank car markets banks  Numerous industry presentations, articles and advising  Government agencies, industry advocacy groups  Equipment leasing North American Crude By Rail Challenges and Growth Analysis 3

Unconventional Energy Resources US Shale (and Canadian) Western Canadian (WC) Oil Sands Source: CAPP, About Oil Sands, June 2013 Source: EIA, May 2014   Innovative, new E&P technologies developed by Multi-billion dollar capital investments required by smaller entities has allowed additional hydrocarbon a limited number of players to set up production production in new locations; each well <$10MM infrastructure   “Mass production” methodologies developed to Open surface mining shifting to SAGD process will lower costs harvest more bitumen over long term  Challenges -> product variability and  Challenges -> distance to markets and volatility diluent North American Crude By Rail Challenges and Growth Analysis 4

N.A. Crude Logistics Alaska Oil Flow Production Sands Before 2010 Waterborne Imports PADD V PADD I Refineries PADD II Refineries California Refineries Production PADD III to PADD II Waterborne Permian Imports Vertical Drilling PADD III Refineries • Coastal refineries mainly supplied by waterborne imports Waterborne • Mid-Continent supplied Imports Gulf of Mexico Production from Gulf North American Crude By Rail Challenges and Growth Analysis 5

N.A. Crude Logistics Alaska Production Flow - 2014 Oil Sands Bakken Waterborne Imports PADD V Refineries PADD II PADD I Refineries Refineries California Production PADD III to PADD II Waterborne Imports Permian PADD III “Re - plumbing” in process Refineries • Pipelines are reversing, repurposing and being built • CBR is a flexible, rolling Eagle Ford Gulf of Mexico pipeline with multiple Production Waterborne destinations Imports North American Crude By Rail Challenges and Growth Analysis 6

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 7 Shale Development: The Evolving Transportation Impacts

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) Example  Railroad operating practices and maintenance procedures must be robust only 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  North American Crude By Rail Challenges and Growth Analysis 8

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 ORAreas 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) Tank Car  If ECP braking system is required it would require large investments and modifications Insulation Manway Top Fittings Housing Three tank car options announced for HHFT trains (minimal ~ large Tank Jacket negative) Tank Shell  PHMSA and FRA Designed Tank Car, AAR 2014 Tank Car, Enhanced CPC 1232 Tank Car Tank Head  2 with shell thicknesses of 9/16”  NPRM expects existing 7/16” shells will meet new standard (9/16”) by adding an additional Bottom Outlet Head Shield 1/8” thickness to the retrofitted jacket (no grandfathering in mentioned in NPRM) Valve/Protection Skid  Uncertainty on how many cars can actually have this performed and to what extent tank Source: API with PLG simplification car owners will want to retrofit North American Crude By Rail Challenges and Growth Analysis 9

US Crude By Rail 2014 Growth Analysis Carloads/Quarter Bakken Bbls/Day 1,000,000 120,000 US Crude 100,000 Originated 800,000 (carloads/quarter) 80,000 600,000 Bakken Crude by Rail (bbls/day) 60,000 400,000 40,000 200,000 WTI-Brent 20,000 equilibrium 3Q3013 Source: NDPA, STB, PLG - - Analysis, September 2014 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Bakken CBR lower in 2014 than predicted due to:   Railroad performance related to severe winter and Decrease in CBR shipments to USGC due to pipeline large grain harvest expansion   Slowing of crude production during severe winter Delays in offloading terminals in PNW and CA caused by environmental and permit issues North American Crude By Rail Challenges and Growth Analysis 10

Western Canada 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 North American Crude By Rail Challenges and Growth Analysis 11