PLG presentation on crude by rail at FTR conference in Indianapolis: North American Crude By Rail Challenges and Growth Analysis

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

2. 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
Partial Client List
North American Crude By Rail Challenges and Growth Analysis

3. 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
North American Crude By Rail Challenges and Growth Analysis

4. 4
Unconventional Energy Resources
US Shale (and Canadian) 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 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 -> distance to markets and
diluent
Source: EIA, May 2014
North American Crude By Rail Challenges and Growth Analysis

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

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

7. 7
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
Shale Development: The Evolving Transportation Impacts

8. 8
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)
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
North American Crude By Rail Challenges and Growth Analysis

9. 9
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)
If ECP braking system is required it would require large investments and modifications
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 Car
Insulation
Top Fittings Housing
Manway
Tank Jacket
Tank Shell
Tank Head
Head Shield
Source: API with PLG simplification
Bottom Outlet Valve/Protection Skid
North American Crude By Rail Challenges and Growth Analysis

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

11. 11
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
Western Canada Oil Sands Production Processes
Mining
Source: www.epmag.com
Drilling -SAGD
North American Crude By Rail Challenges and Growth Analysis

12. 12
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 kbpdby end of September and potentially up to 800 kbpdin 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
North American Crude By Rail Challenges and Growth Analysis

13. 13
Distance Challenge -Western Canada to US Gulf Coast
North American Crude By Rail Challenges and Growth Analysis
Western Canadian oil is landlocked and competes with global waterborne crude supplies with much lower transportation costs
US Gulf Coast is natural home for western Canadian heavy crude
Up to 300 miles of feeder pipeline to rail/pipe terminals
Over 2,100 more miles on either pipeline or rail to US Gulf Coast
Long term committed pipeline has significant cost advantage vs rail shipments of dilbit (reducing diluent amount increases rail competitiveness)
Source: Keystone XL EIS, PLG Analysis
Hardistyto US Gulf Coast
Pipeline Long Term Committed
Pipeline Uncommitted
Dilbit Unit train
Dilbit Manifest
Miles
2,125
2,125
2,475
2,475
Transit time for crude (days)
20
20
8
20
Total Cost ($/bitumen bbl)
$18
$25
$25
$29

14. 14
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
North American Crude By Rail Challenges and Growth Analysis

15. 15
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Canadian CrudeOil Exports by Rail(bbl per day)
Bbls/day
North American Crude By Rail Challenges and Growth Analysis
Canadian Crude By Rail 2014 Growth Analysis
Source: National Energy Board (Canada), September 2014
Canadian Crude Oil Exports by Rail
Shutdown of CanexusBruderhiemloading terminal due to pipeline issues –was largest loading terminal in WC
Delays in opening of other unit train loading terminals in western Canada
Tighter differentials between Canadian and US landed import heavy crude prices
Over 100k b/d of crude is also moved within Canada
Canadian CBR lower in Q2 2014 then predicted

16. 16
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
North American Crude By Rail Challenges and Growth Analysis

17. 17
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)
North American Crude By Rail Challenges and Growth Analysis

18. 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 / trobinson@plgconsulting.com