On October 15, 2013, PLG CEO Graham Brisben presented to GE Capital in New York, New York. Graham’s presentation addressed transportation updates in the Oil & Gas market which have upended traditional logistics and trading patterns in the energy industry, starting an industrial renaissance in the U.S.

1. Logistics
Engineering
Supply Chain
Oil & Natural Gas:
The Evolving Freight
Transportation Impacts
Prepared for
GE Capital
October 15, 2013
New York, NY
1

2. About PLG Consulting
» 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
2

3. The Shale Development
Revolution – Big Picture
Disruptive
Technologies
• Hydraulic Fracturing
• Horizontal Drilling
Market Dynamics
• Supply & Demand
• Customers
• Price
• Logistics
Continuous
Evolution
• Productivity
• Rapid Change
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
4

5. Rapid Improvements in Operational
and Cost Efficiency
» 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
Representative Productivity Gains – Fayetteville Shale Play
Source: BENTEK, September 2013
Source: Southwestern Energy investor presentation, June 2013
5

6. Shale Driving Growth in Natural
Gas and Crude Oil Production
U.S. Crude Oil Production
» 1,756 rigs in operation in USA as of Oct. 4, 2013
July 2013 7.49 MM bpd
» 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)
Source: EIA
GAS OIL THERMAL
Source: Baker Hughes 2013
Source: Bentek
Source: Baker Hughes
6

7. US Shale Plays
Most Active Plays
Gas:
Marcellus
Haynesville
Barnett
Oil:
Bakken
Eagle Ford
Permian Basin
Emerging Plays
Utica (NGLs)
Niobrara
Mississippi Lime
7

8. Shale Development Supply Chain
and Downstream Impacts
Inputs
>>
Wellhead >> Direct Output >>
Thermal >>
Fuels >> Raw Materials
>>
Downstream Products
All Manufacturing
Generation
Process Feedstocks
Proppants
Fertilizer (Ammonia)
Gas
OCTG
Chemicals
Water
Steel
Home Heating (Propane)
Methanol
Other Fuels
NGLs
Crude
Feedstock (Ethane)
Chemicals
Byproduct (Condensate)
Petroleum Products
Cement
Petrochemicals
Other Fuels
Gasoline
8

9. Railcar Industry Impacts
» 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, wideranging, and positive with only one
exception
9

10. Hydraulic Fracturing Materials
Inputs and Logistics – Per Well
Materials
Source to
Transloading
Transloading to
Wellhead Site
Waste Water
~500 Total
Truckloads
Proppants
40
160
OCTG (Pipe)
5
20
Chemicals
2
8
Clean Water/
Cement
Local source
~1,000
47 Total
Railcars
~1,200 Total
Truckloads
Oil/Gas/NGLs
Truck, Rail,
Pipeline
10

11. Correlation of Operating Rig Count
with Sand and Crude Shipments
200,000
2,500
Operating On Shore Rigs
All Sand Carloads
180,000
Petroleum Carloads
2,000
140,000
Carloads
120,000
1,500
100,000
80,000
1,000
60,000
40,000
Operating Onshore Rigs
160,000
500
20,000
0
0
2007
Avg.
2008
STCC 14413 (sand) and 13111 (petroleum)
Avg.
2009
2010
Source: US Rail Desktop, Baker Hughes
2011
2012
2013
11

12. All Sand Handled by Railroad
50,000
45,000
40,000
Carloads
35,000
30,000
UP
BNSF
25,000
NS
20,000
CN
CSXT
15,000
CPRS
KCS
10,000
5,000
0
Quarterly Data
STCC 14413 Source: US Rail Desktop
12

13. Upper Midwest Sand Shipping Flows
Major Frac Sand Mining Areas
Frac Sand Transloading Clusters
Major Frac Sand Rail Traffic Lanes
13
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
14

15. Processed Sand Total Delivered
Cost per Ton
» “Benchmark” unit train example – Illinois to
South Texas
Total Delivered Cost per Ton ~ $122
§ 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
Rail Freight,
FSC and
Eqp Lease,
42%
Sand, 33%
Destination
Transload
& Trucking,
25%
» 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
Source: PLG analysis using BNSF public pricing – does not include fixed assets at origin or destination
Logistics costs
drive ~ 67% of
total delivered
sand cost
15

16. Supply Chain Critical to Success
in Sand Industry
Mining
Processing
Rail
Load-out
Long Haul
Rail
Transloading
and Storage
» 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?
Trucking to
Well
Best “Tier
1”
suppliers
will win
§ 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
16

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
17

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
18

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
Propane
Normal Butane
Iso-Butane
Condensate
~42-65%
~28%
~8%
~9%
~13%
» Crude Oil
§
§
Bakken play as a model
Surging Permian and Eagle Ford development
19

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
Source: RBN
» 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; “reshoring”)
Specific sectors that use natural gas as a
feedstock
–
–
–
Methanol (16MM m/t new capacity under consideration)
Steel
Fertilizer
Source: RBN, PLG analysis
20

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
Fuel Cost Comparison for Electricity
Generation
Source: Bentek, PLG analysis
Source: RBN Energy, June 2013
21

22. Shale Related Rail Traffic Still Small
Relative to Coal Volumes
Railcars Handled: Sand, Crude, & Coal
2,500,000
Carloads
2,000,000
1,500,000
Sand
1,000,000
Crude
Coal
500,000
2013
2012
2011
2010
2009
2008
0
Sand
Crude
Coal
Quarterly Data
STCC 14413 (sand), 13111 (petroleum), 11212 (coal)
Source: US Rail Desktop
22

23. Coal, Crude & Sand Trends:
Carloads and Revenue
Revenue
$18
9
$16
8
7
$14
1,400
Thousands
10
Billions
Millions
Carloads
Combined Sand and Crude Carloads and Revenue
1,200
Crude
Revenue
$4.5
$4.0
$3.5
1,000
$12
6
Sand
Billions
Total Coal Carloads and Revenue
$3.0
$10
800
$2.5
$8
600
$2.0
5
4
3
2
1
-
STCC 14413 (sand), 13111 (petroleum), 11212 (coal)
$6
$1.5
400
$4
$2
$0
Source: US Rail Desktop
$1.0
200
-
$0.5
$0.0
23

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
24

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
25

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)
26

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
27

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
Selected US Natural Gas Import & Export Infrastructure
Source: Congressional Research Service, EIA
Source: Waterborne Energy Inc. Data in $US/MMBtu
28

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
29

30. 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
Source: American Chemistry Council, May 2013
30

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
31

32. Natural Gas & Petrochemical
Downstream Products
Low-Density
Polyethylene
Food packaging, film,
trash bags, diapers, toys
High Density
Polyethylene
House wares, crates,
drums, food containers,
bottles.
Ethylene
Dichloride
Vinyl Chloride
PVC
Antifreeze
Natural Gas,
OIl
Ethylene
Oxide
Ethylene
Glycol
Fibers
Siding, windows,
frames, pipe, medical
tubing
Pantyhose,
carpets, clothing
PET
Miscellaneous
Ethane,
Naphtha, etc.
Feedstock/
Intermediary
Finished
Products
Ethyl
Benzene
Styrene
Bottles, film
Polystyrene
SAN
Insulation, cups
SBR
Ethylene
Linear
Alcohols
Detergents
Latex
Miscellaneous
Tire, hose
Vinyl Acetate
Adhesives, coatings, textile/
paper. finishing, flooring
Miscellaneous
Instrument lenses,
house wares
Medical gloves,
carpeting,
coatings
32

33. Looking Ahead: NGLs
» 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
Source: Canadian Energy Research Institute
» 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: Sunoco Logistics
Source: RBN, PLG analysis
33

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
34

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
35

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
36

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
37

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
38

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 midcontinent and USGC refining areas
Source: CAPP, June 2013
US Crude Oil Production Growth
by Grade
Source: Turner Mason, RBN Energy
Source: RBN Energy
39

40. US Crude Market Overview
ANS
Oil
Sands
Hardisty, AB
Pacific Northwest
Refiners
PADD V
Demand
2,400
kbpd
Bakken
Clearbrook, MN
Light/Sweet
PADD II
Demand
Heavy/Sour
3,250
kbpd
East Coast
Refiners
Light/Sweet
California
Refiners
Heavy/Sour
Midwest
Refiners
1,050
kbpd
PADD I
Demand
Light/Sweet
Heavy/Sour
Cushing, OK
Permian
Brent
St. James, LA
LA Gulf Coast
Refiners
TX Gulf Coast
Eagle Ford Refiners
Mexican Maya
7,650
kbpd
PADD III
Demand
Light/Sweet
Sources: EIA, PLG Analysis (Google Earth)
Venezuela Crude
Heavy/Sour
West African
Brent
Middle East
40
West African

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)
41

42. 2013: Rail Captures 70% Market
Share of Bakken Production
~874,000 BPD July 2013
» Takeaway capacity now
exceeds production
First outbound unit
train shipment
December, 2009
» Pipelines operating below
capacity; some project
cancelations
Source: EIA, North Dakota Pipeline Authority, PLG
» Strong rail volumes to start
the year have leveled off
as of May
Source: North Dakota Pipeline Authority, PLG Analysis
42

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
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
155,000
205,000
205,000
30,000
30,000
30,000
925,000
975,000
975,000
BNSF Total Capacity
CP Total
Various Sites in Minot, Dore, Donnybrook, and Gascoyne
Total Crude Oil Rail Loading Capacity
*Project still in the review or proposed phase
Source: North Dakota Pipeline Authority (September 2013), PLG Analysis
Year End System Capacity
43

44. North Dakota Class I Railroads and
Crude Oil Terminals
Map by PLG Consulting
44
44

45. Bakken Area
Outbound Pipelines
North Dakota Crude Oil Pipeline Capacity (Barrels Per Day)
Pipelines
Butte Pipeline
Butte Loop (Late 2014)
Enbridge Mainline North Dakota
Enbridge Bakken Expansion Program (Q1-11/Q1-13)
Plains Bakken North (Up to 75,000 BOPD)
High Prairie Pipeline*
Enbridge Sandpiper* (Q1 2016)
TransCanada Keystone XL* (2015)
2013
160,000
210,000
145,000
50,000
-
Pipeline Total
*Project Still in the Review or Proposed Phase
2015*
160,000
110,000
210,000
145,000
50,000
150,000
100,000
50,000
Hiland Partners Double H Pipeline (Q3 2014, Up to 100,000 BOPD)
2014*
160,000
110,000
210,000
145,000
50,000
150,000
-
50,000
565,000
875,000
975,000
Year End System Capacity
Source: North Dakota Pipeline Authority, September 2013
45
45

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
Bpd = Barrels per Day
Source: North Dakota Pipeline Authority (September 2013) , PLG Analysis
46

47. Crude Oil by Rail vs. Pipeline
» 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
$15.00
$16.00
$14.00
Dollars Per Barrel
§
§
§
§
$12.00
$12.00
$10.50
$10.00
$8.00
$6.50
$6.00
$4.00
$2.00
$Pipeline to
Cushing
Source: PLG analysis
Rail to
Cushing
Pipeline to Pt
Arthur
Rail to Pt
Arthur
47

48. All Crude Handled by Railroad
Volume Growth
90,000
80,000
70,000
Carloads
60,000
BNSF
50,000
UP
CPRS
40,000
NS
CSXT
30,000
CN
KCS
20,000
10,000
0
Quarterly Data
STCC 13111 Source: US Rail Desktop
48

49. 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 (PermianCalifornia)
» Several natural gas
pipeline conversions
planned
Source: CAPP Report, 2013
§ Trunkline (ETP) – Patoka, ILSt. James, LA
§ Energy East (TransCanada) –
Hardisty, AB-St. Johns, NS
49

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, noninsulated 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
50
50

51. Forecast of Crude Railcar
Supply and Demand
Best-Case Crude by Rail Potential vs. Crude
Railcar Capacity
2,500
§
Railcar backlog is through mid 2015;
retirement of old railcars will reduce
capacity if no additional railcars built
2,000
Thousand bbls/day
» Production increases vs. railcar
capacity increases
§
1,500
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
1,000
500
0
Mar-13
» Under best-case scenario for rail
market share capture, data
suggests existing & planned
tank car fleet exceeds demand
Q1 2013 originated rail carloads of crude
petroleum were 97,135, which equates to
755,000 barrels per day (assume 700/bbl.
average capacity)
Sep-13
Mar-14
Sep-14
Mar-15
Other Production Sources
Williston
Oil Sands
Sep-15
Crude Railcar Capacity
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
Sources: CAPP, AAR, NDPA, GATX, and PLG analysis
» Possible retrofit of “old design”
railcars would decrease capacity
§
Approx. 2/3 of unlined, 30K/gallon
fleet would need retrofit
51

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
52

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
53

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
54

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
55

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
56

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
57

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

59. Heavy/Sour Crude Logistics and Price
Differentials – October 2013
Rail
Oil
$69
Sands
Pipeline
Marine
Hardisty, AB
Pacific Northwest
Refiners
PADD V
Demand
Clearbrook, MN
2,400
kbpd
Light/Sweet
Heavy/Sour
PADD II
Demand
California
Refiners
3,250
kbpd
Chicago, IL
Light/Sweet
Heavy/Sour
Midwest
Refiners
Spread
Mexican Maya - WCS
Dec. 2012
$33.55/bbl
Crude Prices from October 2013
Sources: EIA, CME Group, PLG analysis
(Google Earth)
October 2013
$31.50/bbl
Change
-$2.05/bbl
Heavy/Sour at TX GC
Mexican Maya (ship): $101
WCS (pipe): $87
WCS (rail): $93
TX Gulf Coast
Refiners
7,650
kbpd
Mexican Maya
PADD III
Demand
Light/Sweet
Heavy/Sour
59

60. Light/Sweet Crude Logistics and Price
Differentials – October 2013
Rail
ANS
Pipeline
Light/Sweet at PNW
Bakken (rail): $106
Brent (ship): $112
Marine
$93
(wellhead)
Pacific Northwest
Refiners
PADD V
Demand
2,400
kbpd
Bakken
Clearbrook, MN
Light/Sweet at EC
Bakken (rail): $108
Brent (ship): $111
Light/Sweet
Heavy/Sour
Chicago, IL
East Coast
Refiners
California
Refiners
1,050
kbpd
Brent
PADD I
Demand
Light/Sweet
WTI:$103
Heavy/Sour
Cushing, OK
Permian
Spread
Brent - WTI
LLS - WTI
WTI - Bakken
(Clearbrook)
Dec. 2012
$21.83/bbl
$20.00/bbl
Oct. 2013
$6.65/bbl
$2.50/bbl
Change
-$15.18/bbl
-$18.50/bbl
$3.00/bbl
$10.00/bbl
St. James, LA
Light/Sweet at LA GC
Bakken (rail): $108
LLS (local): $106
$7.00/bbl
Crude Prices from October 2013
Sources: EIA, Bloomberg, Baytex Energy,
CME Group, PLG analysis (Google Earth)
TX Gulf Coast
Eagle Ford Refiners
Light/Sweet at TX GC
Bakken (pipe): $104
Brent (ship): $112
WTI (pipe): $109
LA Gulf Coast
Refiners
7,650
kbpd
PADD III
Demand
Light/Sweet
Heavy/Sour
$6
Brent
60

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
Supply Sources
Capital
Key
Drivers
Destination
Markets
Oil Prices
61
61

62. Looking Ahead: Crude Oil Anticipated
Production Growth and Product Flows
1,985
2,590
Oil
Sands
Export
Terminal
Heavy/Sour
Light/Sweet
+30%
Rail
Pipeline
Marine
Hardisty, AB
Pacific Northwest
Refiners
Bakken
871
1,363
Canadian East
Coast Refiners
+56%
Clearbrook, MN
Chicago, IL
California
Refiners
East Coast
Refiners
Cushing, OK
+40%
Anticipated Production
Growth (000 bbl/d)
= Current 2013
= Future 2017
1,200
1,680
+100%
Permian
St. James, LA
800
1,600
LA Gulf Coast
Refiners
Eagle Ford
TX Gulf Coast
Refiners
Sources: BENTEK Energy, CAPP, Railroad Commission of Texas, ND Pipeline Association, PLG Analysis (Google Earth)
62

63. Professional Logistics Group
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
63