A Strategic Approach to Shipping a Percentage of Producers Crude Oil to Market via Rail v. Pipeline

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1 A Strategic Approach to Shipping a Percentage of Producers Crude Oil to Market via Rail v. Pipeline Crude Oil Markets, Rail & Pipeline Takeaway Summit: Western Canada 2012

2 Discussion Agenda Assumptions Growth of Canadian oil supply Key demand growth areas Market structure: pricing Strategic factors for sustainable oil shipments by rail Market access: Pipeline reach v. rail reach Pipeline business model v. Rail business model Comparative infrastructure requirements Public perception and regulatory considerations: Pipeline v. rail Cost structure: focus factors to enhance competitiveness and sustainability of oil by rail Channel-to-market cost structure: cost to serve Rail factors that reduce channel-to-market cost Pipeline v. rail infrastructure requirements Efficiency factors; challenges & considerations for oil-by-rail Strategic conclusions regarding oil-by-rail

3 Assumptions: Western Canada Oil Production Forecast THOUSAND BPD 7,000 6,000 5,000 Forecast 4,000 3,000 2,000 Total Western Canada projected oil production exceeds 6%AGR through 2020, in spite of declining conventional oil production 1, Western Canada Light and Medium Canada Oil Sands Mining AB & SK Conventional Heavy Canada Oil Sands In-Situ Source: CAPP; 2012 Crude Oil Forecast, Markets & Pipeline

4 Assumptions: Growing Export Demand THOUSAND BPD 1,200 1,100 1,000 Canadian Oil Exports to USA have grown at 4.3% AAGR since 2000, with accelerated growth at 6.5% AAGR in last 3 years Source: CAPP; 2012 Crude Oil Forecast, Markets & Pipeline

5 Assumptions: Oil Demand by Region Source % Canada Other ON & PQ 36% 64% Source % Canada Other ATLANTIC 22% 78% Source % US Canada Other PADD IV 61% 39% 0% Source % US Canada Other PADD V 49% 8% 43% Source % US Canada Other PADD II 54% 43% 3% Source % US Canada Other PADD I 5% 21% 75% Sources: US EIA, Statistics Canada Source % US Canada Other PADD III 34% 2% 64%

6 Assumptions: Regional Benchmark Pricing September Crude Prices relative to WTI WCS ($16) Export demand & west coast refinery demand compared to declining supply support oil-byrail growth Bakken +$4 Midcontinent PL network and reversed central Canada PL cannot supply east coast: PL by rail demand sustainable ANS +$17 Brent +$18 SJVH +$5 WTI $95 WCS = Western Canada Select (increasing) ANS = Alaska North Slope (declining) SJVH = San Joaquin Valley Heavy Maya = Mexican Maya (declining) LLS = Louisiana Light Sweet Maya +$6 LLS +$15 New PL capacity out of Cushing will reduce need for rail to USGC by 2015 Source: CAPP, Canexus, Bloomberg

7 Pipeline-to-Market Business Model Producer Pipeline or truck Intermediate Terminal Pipeline Destination Terminal Pipeline Transportation & terminalling cost varies by Founding or non-founding shipper status Distance Intermediate services (I.e., blending) Generally long-term commitments Fixed destination options Working capital Residence time to market = 4 8 weeks Substantial working capital in line fill All in cost to move oil to market: $8 $12 USD/BBL Refinery Source: Canexus data

8 Pipeline-to-Market Business Model Four principal pipeline systems originate from Edmonton/Hardisty; Combined takeaway capacity = 3.5 Million BPD Enbridge Mainline: 2.3 million KBPD Kinder Morgan Trans Mountain: 300 KBPD; Kinder Morgan Express: 280 KBPD Trans Canada Corporation s Keystone Phase 1&2 : 590 KBPD Proposed expansions (not approved) = 1.9 Million BPD Enbridge Northern Gateway: Bruderheim to Kitimat KBPD; Completion 2018? Public acceptance/project approval in question Enbridge Alberta Clipper: Hardisty to Superior, WI: increase 450 kbld to 570 KBPD Southern Access downstream of Clipper: increase from 400 KBPD to 560 KBPD; 2014 Trans Canada Keystone Expansion: increase to 835 KBPD; Completion 2015? Kinder Morgan Trans Mountain: increase to 750 KBPD; Completion 2017? Public acceptance/project approval in question All pipelines move product to PADD II, PADD III or BC coast for export Sources: CAPP, Publicly available Information

9 Pipeline-to-Market Business Model: Advantages Established mode of transporting oil to market Efficient for rateable high volume shipments Long-term channel-to-market cost structure certainty Cheapest way to move standard grades of oil to pipeline accessible markets

10 Pipeline to Market Business Model: Disadvantages Two-tier pricing structure Advantaged founding shipper pricing requires long-term take-or-pay commitment Pricing for non-founding shippers materially higher Origin and destinations are fixed and inflexible: no market options Ongoing opportunity costs incurred for not having a flexible channel-to-market Oil transactions are limited to refineries on the pipeline Pipeline specifications are fixed and commoditized No boutique niche product opportunities Diluent required to transport bitumen Pipeline outages constrain production and/or depress oil prices Fully transparent pricing market enhances buyer power Pipeline transit is ~2 weeks slower than rail: higher working capital cost

11 Rail-to-Market Business Model Pipeline or truck Producer Source Terminal Rail to Refinery Source: Canexus data Refinery Potential diluent backhaul Potential diluent backhaul Transportation & terminalling costs vary by Railcar cost: railcar lease buying power Distance, source and destination (rail route) Pipeline v. truck to source terminal Trucking distance Rail carrier competitive tension Freight buying power and shipment volume Backhaul or no backhaul (truck and/or railcar) Railcar payload: API 8 = 500 BPRC; API 18 = 600 BPRC; dilbit can move with little or no diluent Generally short- to mid-term commitments Terminal commitment Railcar lease commitment Flexible destination options Some products require steaming at destination Working capital en route 5 14 days All in cost to move oil to market: $9 $17 USD/BBL

12 Rail-to-Market Business Model: Wide Range of Destination Options Edmonton to Chicago (CN and CPR): Chicago: Connect south to USGC or east to US eastern seaboard Edmonton to Eastern Canada destinations (CN and CPR): Ontario (CN & CPR) PQ (CN & CPR) New Brunswick (CN) Eastern US destinations direct (CN and CPR) West to Vancouver (CN and CPR) South to PADD III, PADD II, California (CPR to BNSF) South to Minneapolis to Union Pacific & western US destinations (CN & CPR) South to Kansas City to KCS & USGC destinations (CPR) CN connections to multiple US destinations through Noyes, MN; Superior, WI; Buffalo, NY CN direct to USGC destinations

13 Rail to Market Business Model: Advantages Flexible market access facilitates capturing benchmark pricing differentials Scalable from 600 to 60,000 BBL per shipment Ability to preserve niche product specifications less commoditization Ability to ship bitumen and very heavy conventional crudes with little or no diluent Shipper anonymity not a fully transparent pricing market No public consultation process to initiate shipping Lower capital cost to support rail channel-to market, therefore shorter expected commitments than pipeline Opportunity to enhance channel-to-market reliability with multiple serving railroads Fast shipment time: 5-14 days to market Proven model: Bakken success

14 Rail to Market Business Model: Capturing the Oil Price Spread USD/BBL WCS Discount v. WTI USD/CAD WTI WCS USD % WTI 2005 $56.56 $ $ % $66.22 $ $ % $72.31 $ $ % $99.65 $ $ % $61.80 $ $ % $79.53 $ $ % $95.12 $ $ % $ $ $ % Source: Bloomberg Industry Blended Index

15 Rail to Market Business Model: Capturing the Oil Price Spread

16 Rail-to-Market Business Model: Disadvantages More expensive to move commodity oil to markets that are well served by high-volume pipelines Tank car availability impacts time required to initiate shipments Tank car commitments up to 7 years may be required Truck availability (if trucking to source terminal) Emerging market in Western Canada; limited capacity Emerging (growing) destination unloading capacity Oil producer may not have in-house rail transport expertise and buying power Supply chain costs negotiated for 1 5 years

17 Comparative Infrastructure Requirements Pipeline-to-market: Multi-billion dollar investment Substantial public interface, approval and permitting required 3 10 year lead time Rail-to-market: $15 - $150 Million investment (depending on throughput capacity, storage, pipeline connection, etc.) Limited public interface, approval and permitting required 3 24 months lead time

18 Considerations for Selecting Rail Terminalling Provider Design for minimizing cost, maximizing efficiency: Safe operating track record 24 x 7 x 365 operation Minimum tank car residence time to maximize railcar utilization Pipeline-to-rail staging tank capacity On-site storage capacity for products delivered by truck High truck unloading capacity to minimize truck waiting time High throughput efficiency to minimize railcar dwell time Dual serving railroads Geographic location Accurate billing meters Ability to facilitate truck and/or railcar backhauls Ability to handle niche products such as very heavy conventional and minimally diluted bitumen Third-party logistics management, railcar supply, repair and cleaning service offerings

19 Public Perception & Regulatory Considerations Pipeline-to-market: Substantial, high visibility public opposition to new pipeline projects Regulatory hurdles to new pipeline projects Long project lead times Pipeline spills can result in large quantities of product loss, environmental impact and high visibility Rail-to-market: Rail is an accepted and proven mode of transport with significant track infrastructure in place across North America Proven rail networks efficiently move other energy commodities such as coal Product loss in rail incidents has been typically limited to 1 to several railcars; limited loss, limited environmental impact, limited visibility

20 Conclusions: Strategic Oil-by-Rail Approach Rail-to-market is a viable long-term niche oil marketing strategy Not all oil markets are competitive for rail delivery of oil Oil-by-rail costs can be optimized by accessing buyer power through third-party logistics management services Oil netbacks can be enhanced for sellers and purchase prices optimized for buyers by: Target rail shipments to under-serviced pipeline markets Target rail shipments to markets where benchmark price differentials enhance oil value at delivery point Moving oil from niche producers without pipeline access and niche producers with unique product specifications by rail Developing multi-mode marketing strategies to secure the advantages of both pipeline and rail shipments

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