State of the Proppants Market

1. 1
Logistics Engineering Supply Chain
State of the Proppants
Market
Prepared for
Presented by
Taylor Robinson, President,
PLG Consulting
March 12, 2014 Houston, TX

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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
• Private Equity
About PLG Consulting
State of the Proppants Market
Partial Client List

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Proppants – High Level Overview
Common fracking industry “rule of thumb” has been:
 80% / 10% / 10% (Natural Sand, Ceramics, Resin Coated) volume usage
 Everybody has their secret recipe that is different for each play
 Ratio today has shifted towards more natural sand overall
Demand
 Natural sand rising significantly due to new stimulation techniques
 Ceramic and resin coated volumes are flat to down
 Natural sand is ~10% of ceramic proppant cost and can be delivered in cost-
efficient unit train service
Supply
 New natural sand mines continue to come on line, trans-loading is adequate
 New capacity for ceramics coming –PyraMax (Imerys) opening in Wrens, GA
Trends
 Ceramics needed for high pressure drilling – deep shale and dry gas
 Gas rigs still <300, not expected to rise significantly in near future
State of the Proppants Market

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Frac Sand Supply Chain Definition and Industry Trends
Mining Processing Rail
Load-out
Long Haul
Rail
Transloading
and Storage
Trucking to
Well
• Rapid growth and maturation of hydraulic fracturing and frac sand industries simultaneously
• Consolidation of responsibilities – out-sourced or in-sourced
• Demand has fluctuated but strong upward trend
• Sand supply growing while consolidating number of players
• Unit train shipping is the game-changing logistics development
• Trucking market remains regional and disaggregated
State of the Proppants Market

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Frac Sand Deposit Locations
Most desired sand
comes from WI, MN,
IL
MO has momentum
More interest in OK
State of the Proppants Market

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Major Sand Shipping Flows
State of the Proppants Market

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• 72 operational frac sand
mines
• 20 in development
• 13 permitted
• 17 proposed
• Trempealeau County
moratorium on new
facilities effective August
30, 2013
• Most activeWI county
relative to frac sand permits
• 26 companies
• 4,733 acres
• Moratorium in effect for up
to one year, pending
environmental and ethics
investigations
Sand Mining and Processing -Wisconsin
Source: www.wisconsinwatch.org as of May 1, 2013
As of
5/1
Trempealeau
County Area
State of the Proppants Market

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Sand Mining and Processing - Minnesota
Source: www.silicasand.mn.gov
• 20 active frac sand mining, processing and
transloading facilities
• Over 20 facilities in the planning stages
• State has launched multi-agency website
(silicasand.mn.gov) to provide a single source of
information regarding rules and activities
involving the mining, transportation and
processing of silica sand
• Environmental Quality Board (EQB)
• Minnesota Department of Natural Resources (DNR)
• Pollution ControlAgency (PCA)
• Department of Health
• Department ofTransportation
• Department of Agriculture
Rule-
Making
Authority
State of the Proppants Market

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Sand Mining and Processing - Illinois
Major facilities for key players (U.S. Silica,
Santrol/Fairmount, Unimin) and increasing number
of mid-tier and new sand companies
Key players are expanding existing facilities and
acquiring new sites
Well-positioned to provide high-quality Northern
White product at a lower delivered cost per ton vs.
WI/MN sand to
• Eagle Ford
• Permian
• Marcellus/Utica
To-date support from state government leaders for
expansion and new development projects
Increasing environmental protests from citizen
groups
State of the Proppants Market
Source: www.fracktracker.org

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Hydraulic Fracturing Materials Inputs and Logistics Involved
Materials
Chemicals
Clean Water/
Cement
Frac Sand
OCTG (Pipe)
Source to
Transloading
2
Local source
40 ~ 70
5
Transloading to
Wellhead Site
8
~1,000
160 ~ 280
20
~1,200 Total
Truckloads
Oil/Gas/NGLs
Truck, Rail,
Pipeline
Waste Water
~500 Total
Truckloads
State of the Proppants Market

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Frac Sand Handled by Railroads
0
10,000
20,000
30,000
40,000
50,000
60,000
Carloads
Quarterly Data
UP
BNSF
NS
CN
CSXT
CPRS
KCS
STCC 14413 Source: US Rail Desktop
Western carriers
are geographically
advantaged
State of the Proppants Market

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

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End Market Drivers Will Also Influence Growth Curve of Industry
Upside demand levers
• Domestic crude will continue to displace imports
• Global oil prices stay relatively high
• Increase demand for natural gas
• Continued switch to natural gas from coal for electricity generation
• Dry gas exports to Mexico
• LNG exports
• CNG/LNG for transportation markets
• Longer term US natural gas price increases
Downside demand levers
• Crash in crude oil prices
• Government intervention and/or
more regulations
• Global recession
• Fracking technology that
displaces sand as a proppant

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#1 Key to Winning – Most Efficient Supply Chain
Mining Processing Rail
Load-out
Long Haul
Rail
Transloading
and Storage
Trucking to
Well
“Never shut down a well” – supply availability of quality product remains “given”
Total cost “down the hole” by the end customer will become more precise and accurate
• Logistics cost is the highest portion of total delivered cost – best freight and handling cost structure
• Hidden or soft costs at the customer will also drive sourcing decisions
Winners will turn the supply chain into a conveyor belt – smooth, predictable, synchronized
• Find ways to tighten relationship with customers – schedule synchronization
• Utilize supply chain technology to further improve their performance and increase efficiency
• Invest in strengthening supply chain teams
• Cash flow will move up the priority list for sand companies – Inventory management will become important
State of the Proppants Market

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#2 Key to Winning – LeverageWill Drive Further Industry
Consolidation
Mining Processing Rail
Load-out
Long Haul
Rail
Transloading
and Storage
Trucking to
Well
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?
• Will the end customers consider sand to be core competency?
End customers desire “Storefronts” – can choose between “Walmart andTarget”
• Allows them to focus on their core competencies
• Minimizes their inventory costs while maximizing their flexibility
Leaders understand the total cost structure with trade-offs and leverage the whole supply chain
Best
“Tier 1”
suppliers
will win
State of the Proppants Market

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What Will the Proppants Industry Look Like in 3 to 5Years?
Frac sand leads with significant growth forecast
• New fracking techniques and faster well completion for liquids
• New gas demand will drive gas drilling growth down the road
• Resin coated sand and ceramics not expected to grow significantly
• Price inflation coming later in 2014 and 2015?
“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
Will continue to be an exciting industry for the
foreseeable future!

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ThankYou!
For follow up questions and information, please contact:
Taylor Robinson, President
+1-508-982-1319 / trobinson@plgconsulting.com
This presentation is available at:
www.PLGConsulting.com
State of the Proppants Market