Rail summit 06062014 final

Logistics Engineering SupplyChain
Why Shale Gas will
Drive a US
Manufacturing
Revolution
ByTaylor Robinson
PLG Consulting President
June 6, 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
 Financial services
About PLG Consulting
Partial Client List
Why Shale Gas will Drive a US Manufacturing Revolution

3
Today’s Agenda
 What is “new energy” and why is it a game changer for
the US industrial world?
 Impact of shale natural gas and NGL supply streams on
US and global markets
 Downstream impact of shale gas on US manufacturing
industries
 Is shale gas a global phenomenon?

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
Convergence of hydraulic fracturing and
horizontal drilling in past decade
 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
 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
 Intentional dry gas drilling still flat
ShaleTechnology Introduction
GAS OIL THERMAL
Source: Baker Hughes

6
New fracking techniques include:
More well bores per well pad
 Directional bores to multiple shale layers
 Reduced well spacing per acreage – increases
 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 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
New FrackingTechniques Drive Increased Production At Lower Costs
Source: Marathon, February 2014
Source: EIA Drilling Productivity Report, May 2014

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Shale Supply Chain and Downstream Impacts
Feedstock (Ethane)
Byproduct
(Condensate)
Home Heating
(Propane)
Other Fuels
Gasoline
Diesel
Gas
NGLs
Crude
Proppants
OCTG
Chemicals
Water
Cement
Generation
Process Feedstocks
All Manufacturing
Steel
Fertilizer (Ammonia)
Methanol
Chemicals
Petro-chemicals
Other Petroleum
Products
Inputs Wellhead
Direct
Output
Thermal Fuels Raw Materials
Downstream
Products
Jet Fuel
Availability of low cost hydrocarbons positively impact all the North American industrial
economy

8
Shale Gas History and Future Demand
Gas production has increased over past five years
with a significantly lower gas rig count
 1,000 rigs at peak down to ~300 rigs
 Drilling productivity continues to increase production per well
and lower costs
 And the Liquids (Crude, NGL) wells produce dry natural gas as a
by-product
Abundant US gas recoverable reserves
 Low cost reserves in accessible locations near population
 Marcellus gas production is the “eighth largest country” already
 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
Rig Count by Class vs. Gas Production
Source: Bentek, September 2013
Source: RBN Energy, January 2014

9
Shale Gas Is ImportantTo Competitive Power Costs
Natural gas is ~5X cheaper than oil on
a BTU-basis
 Innovation will convert more transportation
fuels and other energy requirements to
natural gas
US electricity prices are the lowest in
the industrial world
 US industries now have substantial power
cost advantage
 Gas drives an increasing share of the US
electricity generation capacity
 Will continue to displace coal due to stricter
environmental regulations on coal-fired
facilities
Natural gas is a cleaner burning fuel
compared to other hydrocarbons
WTI & Henry Hub Natural Gas Energy Equivalent Pricing
Source: EIA, February 2014
~5X
Source: International Energy Agency, October 2013 *estimate

10
Dry and Wet GasTurn Into Downstream Products
 All shale plays have gas as a major
or minor portion of the product stream
 Processing required at each step
Raw Natural Gas
(1500+ BTU)
Processing Plant
Consumer Quality
Dry Natural Gas
Methane
Ethane
42 – 65%
Propane
~28%
Normal Butane
~8%
Iso-Butane
~9%
Natural Gasoline
~13%
NGLs
(3 -9 gallon / MCF)
Y-Grade
Key Petrochemicals
$/MMBtu
Methane $4.53
Ethane $3.64
Propane $11.41
Iso-Butane $16.01
Normal Butane $11.43
Natural Gasoline $20.35
Source: Opis, April 2014 & CME Group, April 2014
“Dry”
“Wet”
Ethane
overabundance
causing deflated
pricing

11
Repurposing and retirement of some
existing pipelines
 New natural gas production has localized the
supply of natural gas for certain areas, therefore,
decreasing the need for some existing natural gas
pipelines
 Some natural gas pipelines being converted to
crude oil
New natural gas pipelines are being
built to transport natural gas out of
Marcellus
 Together the proposed Atlantic Sunrise project
and SabalTrail project would connect Marcellus all
the way toCentral Florida
 Many other smaller pipeline projects are occurring
to move Marcellus natural gas
Historic reversals of import/export
trade flows
 Northeast US-Canadian Maritimes
New Patterns in Natural Gas Supply & Demand
Source: Enbridge, April 2014
NaturalGas Movements

12
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
Overabundance of NGLsWill Grow
Source: IHS Chemical, September 2013
Source: IHS Energy

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Natural Gas Liquids (NGLs)
Pipelines from Utica/Marcellus
 Mariner East to Marcus Hook, PA for export
 Mariner West exports to Sarnia, ON
 ATEX to Mt. Belvieu,TX
 Proposed Utica Marcellus Texas Pipeline to Mt.
Belvieu,Texas (conversion of natural gas
pipeline for most of the route)
New NGL export projects
 Facility expansions and new construction
projects in Ferndale, WA and Port of Longview,
WA
 Further expansions proposed by Enterprise
andTarga in their Gulf Coast export facilities
 Phillips 66, EnergyTransfer,
Williams/Boardwalk and Occidental have all
proposed export facilities out of the Gulf Coast
Natural Gas Liquids Pipelines and Export
Source: MarkWest, PLG analysis, March 2014
Sarnia, ON
Mt Belvieu, TX
Marcus Hook, PA
Source: RBN Energy, January 2014

14
LNG Export Opportunity
Political/policy battle between
domestic industrial users and
producers
Only FERC approved LNG export
terminal is Cheniere Energy’s Sabine
Pass LNG in Sabine, LA
Proposed US LNG ExportTerminals to
FERC (in Bcfd):
There are 12 other US potential export
terminals along with 3 Canadian
proposed sites and 10 other Canadian
potential sites
Supply Sources
Oil Prices
Destination
Markets
Capital
Data in $US/MMbtu
Source: Waterborne Energy from FERC presentation, February 2014
Location Bcfd Location Bcfd
Freeport, TX 1.8 Lavaca Bay, TX 1.38
Corpus Christi, TX 2.1 Elba Island, GA 0.35
Coos Bay, OR 0.9 Sabine Pass, LA 1.40
Lake Charles, LA 2.2 Lake Charles, LA 1.07
Hackberry, LA 1.7 Plaquemines Parish, LA 1.07
Cove Point, MD 0.82 Sabine Pass, TX 2.1
Astoria, OR 1.25

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Panama Canal Expansion
 Has been delayed and now expected at full
capacity by 2016
 Current Panamax vessel size excludes all but
10% of LNG vessels from using the canal
 After expansion, 80% of LNG fleet will be
able to use the canal with vessel capacities
up to 100 MMcf
Benefits for N.A. LNG Exports
 Using the expanded Panama Canal will be a
natural fit for the large number of proposed
GulfCoast export facilities wanting to reach
the growing Asian LNG market
 Trip time cut from 64 days to 44 days,
greatly improving the competitive position
of LNG exports by reducing transportation
cost
Panama Canal Expansion and North American Exports of LNG

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

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Phase I - Steel, Methanol, & Fertilizer Manufacturing in US
Shale gas boom makes direct-reduced iron steel
economical
 Gas strips oxygen from iron core to make high purity/quality
pellets – lower cost vs. scrap steel
 $2B+ in new US projects announced
 DRI-derived steel of higher quality than that scrap steel
U.S. methanol production – 10 projects announced
 Methanol is used in numerous downstream chemical products
 Captures price spread between low-cost natural gas and
methanol allowing move to higher value foreign markets
 US currently represents 10% of the global market demand and
imports 89% of its supply
Natural gas is a feedstock for ammonia production
 Represents ~70% of cash costs (CF Industries)
 12MM mt new domestic manufacturing capacity announced
 Imports will quickly be displaced
Source: IHS Energy, September 2013
Falling Gas Prices a Boon to DRI
Production
Source: GE Capital presentation, November 2013

18
Phase II - Low Cost NGLs Provides Significant Cost
Advantages for Chemicals and Resins
US has a large structural cost advantage due to gas-based
ethane for downstream products
 Europe andAsia are tied to crude-based naptha as a feedstock for their
downstream processing
 US production cost of ethylene is ~40% less than Europe and Asia
However, US ethylene cracker and processing capacity is
tight and ethylene prices are inflated in the short term
 Ethane cracker margins have been as high as 50-60 cents/lb
 Additional cracker capacity expected in 2016/2017
 Margins/prices will moderate as more capacity comes online
 New US resin facilities also on the drawing board
 Excess resin capacity will promote globally competitive prices and large
export increases
ktons
ktons
Source: Townsend Solutions, December 2013
Source: Townsend Solutions , December 2013
30,000
40,000
50,000
2012 2013 2014 2015 2016 2017 2018 2019 2020
North America Ethylene Expansions
Actual Capacity Additional Capacity
Source: Townsend Solutions , December 2013

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Phase III - Material Cost Advantage Is Key Cost Driver to
Future North American Manufacturing Growth
Materials normally accounts for 60-70% of manufacturing
cost of goods sold (COGS)
 Most product cost competition is won or lost here
 Shale gas giving NA cost advantage for steel, plastics and chemicals
Total labor cost is ~20% of COGS for NA manufacturers
 China labor cost in $ will continue to rise due to inflation and currency
appreciation
 Mexico labor has increased competitiveness vs. China, will recapture
manufacturing share for medium/high labor manufacturing
Transportation & Logistics costs are in “Other” 15%
 Asia/China has 5~10% cost disadvantage due to extra ~ 1 month shipping
lead time (major cash flow disadvantage)
 Mexico has “near shore” advantage vs. Asia
 Transportation costs continue to rise – proximity to market advantage
Energy cost is usually less than 5% for final manufacturer
 However, energy costs are buried in raw material costs and transportation
and can be more substantial in energy-intensive products
 US/Canada has a tremendous advantage vs. industrialized world
 Mexico’s power costs will become more competitive with shale gas

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Russia
 Siberian reserves are said to be 80X of Bakken
 Total, Shell, Exxon, Statoil all investing
 Second place soon?
China
 Reserves in remote, mountainous locations
 Technology transfer challenges
 Only one oil company involved – stifles innovation
Argentina
 Concerns with governmental regulation, price controls
 Struggling with high cost proppants
Poland
 Reserves not productive so far – Exxon, Marathon gave up
 Encouraging recent results?
UK
 Some gas reserves
 Government support, but intense environmental opposition
Is Shale Energy A North American Phenomenon?
Source: EIA, June 2013
0
10
20
30
40
50
60
70
80
Shale Oil Resources
(Billion bbls)
0
200
400
600
800
1,000
1,200
Shale Gas Resources
(Tcf)
Technically Recoverable Resources, Source: EIA, June 2013

Logistics Engineering SupplyChain
This presentation is available at:
www.plgconsulting.com/categories/presentations
-
ThankYou !
For follow up questions and information,
please contact:
Taylor Robinson, President
+1 (508) 982-1319 / trobinson@plgconsulting.com

Rail summit 06062014 final

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