western canada crude by rail 2014-09-03

Logistics Engineering Supply Chain

Crude-By-Rail (CBR) Phenomenon: Is Rail

in it for the Long Haul?

Prepared for:

Calgary, Alberta Hyatt RegencySeptember 3, 2014

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

Institutional investors

About PLG Consulting

Crude-By-Rail Phenomenon: Is Rail in it for the Long Haul?

Partial Client List

3

Deep rail industry experience

Operational

Commercial

Design & engineering

Equipment market

Broad CBR industry client experience over

past 3 years

E&P companies

Refiners

Terminal developers

Investors – private equity, hedge funds, investment

banks

Government agencies, industry advocacy groups

Equipment leasing

PLG’s Crude By Rail Industry Qualifications

Diverse projects

CBR supply chain optimization

Rail commercial negotiations

Rail car acquisition – commercial & technical inspection

Comprehensive design & engineering – rail, marine,

tankage, product handling, and related facilities

EH&S training

Investment advising

Industry’s only long term, CBR volume forecast with

complimentary rail tank car forecast

Recognized industry thought leader on CBR

and tank car markets

Numerous industry presentations, articles and advising


4

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


5

Unconventional Energy Resources

US Shale Western Canadian (WC) Oil Sands

Source: CAPP, About Oil Sands, June 2013

Innovative, new E&P technologies developed by

smaller entities has allowed additional hydrocarbon

production in new and existing locations; each well

<$10MM

“Mass production” methodologies developed to

lower costs

Challenges -> product variability and volatility

Multi-billion dollar capital investments required by

a limited number of players to set up production

infrastructure

Open surface mining shifting to SAGD process will

harvest more bitumen over long term

Challenges -> diluent and distance to markets

Source: EIA, May 2014


6

The “Re-Plumbing” of Hydrocarbons in North America

Shift from coastal to mid-continent

supply points necessitated “re-

plumbing” the flow of carbon-based

energy in North America

Pipeline reversals, repurposing, new starts

Crude by rail comes of age – born in the Bakken

Waterborne imports being displaced as

shale oil and oil sands production

comes online

Infrastructure built rapidly to help

facilitate new energy movements

Crude Natural Gas NGLs


Source: Enbridge Investor Presentation, April 2014

North American Crude Supply Growth: 2013-2025

Source: Valero Investor Presentation, July 2014

7

PADD I Refineries

PADD V Refineries

PADD III Refineries

Oil Sands

PADD II Refineries

WaterborneImports

WaterborneImports Gulf of Mexico

Production

Alaska Production

WaterborneImports

California Production

Permian

PADD III to PADD II

• Coastal refineries supplied by waterborne imports

• Mid-Continent supplied from Gulf

N.A. Crude Logistics Flow

Before 2010


8

PADD I Refineries

PADD V Refineries

PADD III Refineries


Oil Sands

PADD II Refineries

WaterborneImports

Gulf of Mexico Production

Alaska Production

WaterborneImports

California Production

Bakken

Permian

Eagle Ford

PADD III to PADD II

WaterborneImports

• Mid-Continent has production over-supply –“exporting” east, west, south

• USGC major supply from TX light and WC bitumen displacing imports

N.A. Crude Logistics Flow

2014~2015

9

Crude by Rail Historical Perspective - Bakken

Three phases of crude by rail phenomenon in

North America

2009-2011

CBR developed from the Bakken to bridge the gap until pipelines

are built

First unit train shipment in Dec. 2009

Destination market: Cushing, OK WTI trading hub

2011-2013

Ascendancy of trading as main growth driver in CBR

WTI-Brent-LLS differentials become all important

St. James, LA LLS hub becomes most attractive destination

Coastal refineries begin rail receipt infrastructure build-out

Tank car market overheats, becomes main growth constraint

2013-current

CBR from Bakken assumes long-term structural role in crude oil

market

Bakken CBR transitioning to east and west coast markets; LLS

and WTI converge as Permian and Eagle Ford growth floods

USGC

Canadian CBR build-out begins; tank car market reorienting to

coiled/insulated car types (~2/3 of CBR fleet order backlog)

0

200

400

600

800

1,000

1,200

Mbbl/d ND Crude Production and Rail Transport

ND Production Crude by Rail

Source: North Dakota Pipeline Authority, PLG Analysis, August 2014

Source: RBN Energy, August 2014

Brent vs. WTI Spread ($/bbl)


10

Oil (bitumen) recovery uses two main methods

- 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

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

Oil Sands Production Processes

Mining

Source: www.epmag.com

Drilling - SAGD


http://www.google.ca/url?sa=i&source=images&cd=&cad=rja&docid=SOCF1ROQEWbOwM&tbnid=FvuCLxhilXUYwM:&ved=0CAgQjRw&url=http://www.ramp-alberta.org/resources/gallery.aspx?galleryimage=965&ei=x8DpUojHFsHcoASJqILoCg&psig=AFQjCNFcddyIwCP7qtRHI-D-Y2Pc4BnO1A&ust=1391137351412286

11

The Diluent Challenge and Possible Solution


Bitumen and diluent definitions Bitumen - heavy, viscous oil that must be processed extensively to convert it into a crude oil

before it can be used by refineries to produce gasoline and other petroleum products

Diluent - lighter viscosity petroleum products that are used to dilute bitumen for

transportation in pipelines

Dilbit – bitumen blended with ~ 30% diluent; allows for crude to flow and meet pipeline specs

Railbit – bitumen blended with ~17% diluent; allows for crude to be transported by rail using

coiled and insulated tank cars

Purebit or Neatbit – raw bitumen with little to no diluent; special steaming equipment is

needed at loading and offloading terminals to transport in coiled and insulated tank cars

Diluent Recovery Unit (DRU) Removes diluent from crude blend at the terminal before it is loaded onto railcar

Diluent returned to field to be reused

MEG Energy is planning on building a $75 M DRU as part of a 250 mile pipeline system from its

Christina Lake project to Canexus, with completion targeted for late 2015

Several other parties/facilities are investigating units; total cost benefit still not fully evident

Challenge at unloading facility if it is NOT the refinery – bitumen needs to flow via pipeline

again

Diluent penalty Additional freight cost (rail cost from WC to USGC)

30% diluent vs 17% diluent: freight costs on 1.43 bbls vs. 1.20 bbls for each bbl of

bitumen @$25/bbl freight costs = $5.60/ bbl of bitumen

Geographical difference in value of diluent

Higher value of diluent in WC vs the value you’ll receive with it blended in bitumen in US

Gulf Coast

Source: CN

12

Western Canada Production Forecasts

Large oil sands capital investments need to be

recovered with growing production

SAGD becoming dominant method with

increased productivity and lowering costs

Canadian shale oil is also increasing production


Some Oil Sands projects have been delayed as a

result of cost competitiveness and capital availability

Increasing production forecast despite lack of

corresponding pipeline takeaway volume growth

over next several years

0

1,000

2,000

3,000

4,000

5,000

6,000

2013 2014 2015 2016 2017 2018

Western Canada Production Estimates (kbpd)

Low Production Forecast

Base Production Forecast

High Production Forecast

*Source: Canadian Associate of Petroleum Producers (CAPP)

*

*

Production forecast increase of 4% CAGR through 2030

13

Current pipelines are at capacity with higher

apportionment due to maintenance and expansion

Oil Sands pipelines are under intense scrutiny and

subject to court challenges and protests in US and

Canada

NEB is extending its review of Trans Mountain expansion

by 7 months

Recent Canadian Supreme Court ruling gives more power

to First Nations in land claims

Innovation with existing pipelines increasing capacity

Enbridge will temporarily switch the flows of Alberta

Clipper and Line 3 on 17.5-mile segment across the US-

Canadian border

Will maximize the flows under existing permits until the

Department of State review is completed on expansion

Increases Alberta Clipper flows by 27% to 570 kbpd by end

of September and potentially up to 800 kbpd in 2015

Large Canadian oil producers and pipeline companies

are strategically investing in CBR as a flexible option

to pipelines for the short and long term

Western Canada Crude Oil Pipelines

Likely Built Within

Medium Term (~2019)

Trans Mountain Express

(Kinder Morgan)

Alberta Clipper (Enbridge)

Keystone XL (TransCanada)

Likely Delayed Until

2020 or Later

Northern Gateway

(Enbridge)

Energy East

(TransCanada)


Source: CAPP, June 2013

14

Western Canadian CBR Loading Update

Estimated WC crude by rail volume ended 2013 at ~150kbpd

Five unit-train crude loading terminals to be in operation

by end of 2014 with ~450 kbpd of takeaway capacity

Additional large-scale capacity expected in 2015

Gibson Energy and USD Group announce commencement of successful

operations at Hardisty rail terminal and open season on Phase 2 which

would double the capacity to 240 kbpd if enough interest

Kinder Morgan’s / Imperial’s Edmonton Rail Terminal will potentially increase

an additional 40 kbpd from its initial planned capacity to a total of 250 kbpd


Company Location 2014 Capacity (kbpd)

2015 AdditionalCapacity (kbpd)

Altex Lashburn, SK 60

Canexus Bruderhiem, AB 70 +30

Gibson/USD Hardisty, AB 120 +120?

KM/Keyera Edmonton, AB 40

Torq Kerrobert, SK 168

KM/Imperial Edmonton, AB - +210

15

Heavy Crude Unloading Overview (USGC)

US Gulf Coast is logical home for WC heavy crude, however,

unit train unloading facilities with steaming capabilities

seem to be lagging growth of loading facilities in WC

Current unloading facilities are mainly handling dilbit in

higher volume and railbit in lower volumes due to

investment required for steaming equipment

Current unloading facilities for WC heavy crude

Other large terminals advertise they are in process of

developing steam capabilities Arc Terminals - Mobile, AL expand to 92 kbpd

Jefferson Refining - Beaumont, TX – install steaming equipment for 70 kbpd

Genesis – Raceland, LA – 2 trains per day, start-up Q1 2015, heating

capability


Company Location Heating Capabilities?

Genesis Natchez, MS Yes

Valero St. Charles, LA Yes

GT Omniport Port Arthur, TX Investing

KM/Watco Houston, TX Possibly

Texas Int. Terminals Galveston, TX 2015

Genesis Maryland, LA Yes

Source: Gateway Terminals

Source: Texas International Terminals

16

Oil Sands

Hardisty, AB

$77

Heavy/Sour at TX GCMexican Maya (ship): $92WCS (pipe): $95WCS (rail): $101

Sources: Enbridge Investor Presentation, EIA, PLG analysis (Google Earth)

Mexican Maya

Marine

3,375kbpd

2,525kbpd

PADD III Demand

8,150kbpd

PADD VDemand

Light/Sweet

Heavy/Sour

Light/Sweet

Heavy/Sour

Heavy/Sour

Light/Sweet

PADD IIDemand

TX Gulf Coast Refiners

Pacific Northwest Refiners

California Refiners

MidwestRefiners

Rail

PipelineClearbrook, MN

Chicago, IL

Spread Jan. 2013 August 2014 Change

Mexican Maya - WCS $38/bbl $15/bbl -$23/bbl

Heavy Crude Market and Price Differentials


17

High Profile Accidents Changing Crude by Rail

Rail industry has a strong safety record, but optics of CBR

accidents are overwhelming 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)

Railroad operating practices and maintenance procedures must be robust

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


Example only

18

U.S. DOT NPRM Potential Impact On CBR

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 OR Areas 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)

If ECP braking system is required it has potential to negatively impact CBR

Three tank car options announced for HHFT trains (minimal ~ large

negative)

PHMSA and FRA Designed Tank Car, AAR 2014 Tank Car, Enhanced CPC 1232 Tank Car

2 with shell thicknesses of 9/16”

NPRM expects existing 7/16” shells will meet new standard (9/16”) by adding an additional

1/8” thickness to the retrofitted jacket (no grandfathering in mentioned in NPRM)

Uncertainty on how many cars can actually have this performed and to what extent tank

car owners will want to retrofit


Tank CarInsulation

Top Fittings Housing Manway

Tank Jacket

Tank Shell

Tank Head

Head Shield

Source: API with PLG simplification

Bottom Outlet Valve/Protection Skid

19

Bakken and WC Crude Oil Takeaway Forecast

Source: www.CBRforecast.com

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2013 2014 2015 2016 2017

Base Case Takeaway (kbpd)

Pipeline

Crude by Rail

Local Refining


20

Tailwinds

New WC pipelines will likely be

delayed beyond announced dates

Increasing Bakken & Oil Sands

production

Additional imports still to be

displaced in US east, west, USGC

More terminals coming online

US crude export ban easing

(condensate first)?

West coast export potential for WC

bitumen via rail?

N.A. Crude By Rail Future Drivers

Headwinds

Oversupply of light crude in the US

2014~2015 -> “Day of Reckoning”

Environmental hurdles at terminals

causing delays in permitting (CA, WA)

Tight railcar supply due to new rail car

regulations impact

WC pipelines will eventually be built

(2018 or beyond) and take CBR share

Potential regulatory backlash from

future disasters? (biggest wild card)


Logistics Engineering Supply Chain

This presentation is available at:www.plgconsulting.com/categories/presentations

-

Thank You !For follow up questions and information,

please contact:

Taylor Robinson, President+1 (508) 982-1319 / [email protected]

http://www.plgconsulting.com/categories/presentations

mailto:[email protected]

western canada crude by rail 2014-09-03

Business