Understanding Crude Oil Transportation by Rail

Trisha Curtis, Director of Research, Upstream and Midstream Energy Policy Research Foundation, Inc. (EPRINC) EPA Brown Bag Lunch Presentation November 12th, 2014 Understanding Crude Oil Transportation by Rail

2 About EPRINC

• www.eprinc.org • Infrastructure Paper http://eprinc.org/wp- content/uploads/2013/10/EPRINC- PIPELINES-TRAINS-TRUCKS-OCT31.pdf • Oil and Gas Journal • Embassy Series • Presentations at Imperial College London, Colombia University, Wyoming Pipeline Authority • Department of Energy – Quadrennial Energy Review • Department of Defense • Rin App http://eprinc.org/2014/02/rins- around-rosy-app-available-ios/

3 North American Oil Production 14000

12000

10000 Canadian Crude Oil Production

8000 U.S. Field Production of Crude Oil Mbbl/d 6000

4000 Thousand Barrels Per Day Thousand Per Barrels

2000 U.S. 8.7 mbd Canada 3.5 mbd 0 August North America = 12.2 mbd

Source: EIA

4 Permit Activity

Williston Basin

Powder River Basin DJ Basin (Niobrara Reservoir) Uinta Basin Utica

Permian Anadarko Basin (Mississippian, Granite Basin Wash, Mississippi Lime and other stacked plays) Eagle Ford Reservoir

Source: HPDI Oct 2014, Past 90 Days

5 EPRINC Production Evaluation

12 mbd

8 Production Production 6

0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

0-25 25-35 35-42 42-50 50+ Source: EPRINC/Ponderosa 6 CAPP’s Canadian Crude Oil Forecast

Source: CAPP 2014, “Crude Oil Forecast. Markets, and Transportation”

7 Total Imports, Production, Canadian Imports

12000

U.S. Imports from 10000 Canada of Crude Oil Mbbl/d 8000 U.S. Imports of Crude Oil Mbbl/d 6000

4000 U.S. Field

Production of Thousand Thousand per Day Barrels Crude Oil Mbbl/d 2000 Canadian 0 Imports 3 mbd or 40%

Source: EIA

8 U.S. Imports from Abroad Steadily Decline

4000

3500

3000 - Impact on prices 2500 as African crude is 2000 pushed

1500 out and now onto Thousand Barrels Per Day ThousandPer Barrels 1000 world market 500

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Africa Middle East South America Europe North America Eurasia

9 U.S. Rig Count

2500

2000

1500

Oil

# of Rigsof # 1000 Gas Total

500

Source: Baker Hughes

10 Drilling Then and Now

Source Rocks

Source: From PIECE Course Workbook, Mark J Kaiser, Houston, July 2008, “Introduction to USA Petroleum Industry” 11 Shale Oil Play Production

1,800,000 Permian Basin 1.6 mbd 1,600,000

1,400,000

1,200,000 Eagle Ford 1.4 mbd

1,000,000

800,000 North Dakota

1.13 mbd Barrels Per Day Per Barrels 600,000

400,000 Colorado 216,000 b/d 200,000

Wyoming 213,000 b/d

Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13

Apr-14 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Eagle Ford North Dakota Permian Basin Wyoming Colorado

Source: HPDI Nov 2013, EIA, NDPA

12 Drilling Advances

Source: Triangle Petroleum Corporation, Presentation Bakken Product Markets and Take-Away Denver Jan 31-Feb Source: Continental Resources March Investor Presentation, Permission granted 1 2012

13 How is Crude Moved and Why?

14 Transportation Methods of Crude Oil and Petroleum Products

Moved from tank storage at the wellhead to refineries via pipeline, truck, rail, barge, or all four methods in combination

15 Why transport crude oil via rail?

Source: EPRINC Maps using Hart Energy data and ArcGIS Mapping software

16 How much crude oil does a tank car hold?

• One tank car holds about 700 barrels of crude oil (might be more or less depending on design, thickness of tank, heated tank car for bitumen, etc.)

• Unit Train = 120 tank cars of one product (scalability to maximize efficiency and reduce cost) = 84,000 barrels

• Manifest Train = Less than 100 tank cars, can Source: DOT 111, Wikipedia be multiple commodities, not as economic, but used widely in beginning of crude by rail movement because some refineries and facilities were already equipped to handle manifest train shipments

17 Pipeline vs. Rail Costs

• From Bakken to Coasts between $10 - $15 • Slight increases due to fees by railroads for older tank cars and testing fees • From Alberta to Gulf $20

Source: EPRINC Maps using Hart Energy data Source: CAPP 2014 Forecast and ArcGIS Mapping software

18 Role of rail in upstream, midstream, and downstream

Source: BNSF Presentation, Sept 2013, via DOT website

19 Infrastructure and Pricing

20 North Dakota Crude Oil Transport

January 2012 Estimates March 2014 Estimates

Aug 2014 Estimates

Source: North Dakota Pipeline Authority 21 July 2014 Williston Basin Crude Transportation Williston Basin Production: 1.2 mbd North Dakota: 1,132,331 b/d South Dakota: 4,675 b/d Eastern Montana: 75,162 b/d

Tesoro Refinery: 68,000 b/d

Truck to Canadian Pipeline: 8,000 b/d

Rail: 766,000 b/d

Pipeline: 432,168 b/d

Source: NDPA, EPRINC Estimates

22 Williston Basin Rail Estimates

900,000

800,000

700,000

600,000

500,000

400,000 Barrels Per Day Per Barrels 300,000

200,000

100,000

Jan-10 Jan-07 Jan-08 Jan-09 Jan-11 Jan-12 Jan-13 Jan-14

Sep-11 Sep-07 Sep-08 Sep-09 Sep-10 Sep-12 Sep-13

May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14

Source: NDPA

23 Pipeline Capacity Ample

• Plenty of pipeline capacity now, but if more crude should move back to pipe (continued rail concerns regarding Dec regulation uncertainty) could see prices further decline in Clearbrook and in Wyoming

Source: EPRINC’s article in Oil and Gas Journal March 2014 24 U.S. Crude Oil Exports…from PADD III

450 U.S. Exports of Crude Oil Gulf Coast (PADD 3) Exports of Crude Oil 400

350 • Almost all exports of crude oil from 300 the U.S. are to CANADA

250 • Bakken and Gulf Coast crude being 200 sent to eastern Canada pushing out light MENA barrels further 150 depressing prices

100 THOUSAND BARRELS DAY PER BARRELS THOUSAND 50

10 11 12 13 14

13 09 10 10 11 11 12 12 13 14 14

09 10 11 12 13

10 09 11 12 13

09 10 11 12 13

- - - - -

------

- - - - -

Jun Jun Jun Jun Jun Jun

Oct Oct Oct Oct Oct

Apr Apr Apr Apr Apr

Feb Feb Feb Feb Feb

Dec Dec Dec Dec Dec

Aug Aug Aug Aug Aug

Source: HPDI Aug 2014

25 Major Canadian and Shale Oil Crude Flows

Source: EPRINC Choke Point Map using Hart ArcGIS Mapping software

26 Pipeline Choke Points

Source: EPRINC Choke Point Map using Hart ArcGIS Mapping software

27 No place to go…. Crude disposition by refinery region

Source: CAPP Crude Oil Forecast June 2014

28 All Canadian Pipeline Export Options are Full • Kinder Morgan’s Transmountain line off BC coast - currently 300,000 b/d capacity- planned expansion up to 800,000 b/d (early 2017) • (Now Spectra) Platte line to Wood River 280,000 b/d-full

• Enbridge mainline system currently transporting over 1.5 mbd with potential capacity around 2.5 mbd— Northern Gateway off BC coast planned 525,000 b/d, several other planned expansions, light oil access +400,000 b/d to eastern U.S. and Canada

• TransCanada’s Keystone 581,000 b/d-full—XL would add 700,000 b/d, Energy East Pipeline Project 1.1 mbd

Source: Canadian Energy Pipeline Association

29 Canadian Crude by Rail Movements

Source: CAPP 2014, “Crude Oil Forecast. Markets, and Transportation”

30 Supply vs. Take-Away Capacity is Risky at Best

AT RISK

Source: CAPP 2014, “Crude Oil Forecast. Markets, and Transportation”

31 Regional Pricing Disparities

Source: Map from AFPM, Flint Hills, EIA, CME Group, and estimates

32 Price Comparison $160.00

$140.00

$120.00

$100.00

$80.00

$60.00

$40.00

$20.00

$0.00

Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Oct-12 Oct-13 Oct-08 Oct-09 Oct-10 Oct-11 Oct-14

Apr-12 Apr-13 Apr-08 Apr-09 Apr-10 Apr-11 Apr-14

WTI Bakken (North Dakota Light Sweet Flint Hills) WCS (Western Canadian Select) Brent Light Louisiana Sweet First Purchase Price (EIA)

Source: EIA, Flint Hills, CME Group,, Bloomberg

33 Daily Crude by Rail Shipments in the U.S. and Canada

1,800,000 U.S. Average Barrels Per Day of Petroleum 1,600,000 and Petroleum Product 1,400,000 Canadian Average 1,200,000 Barrels Per Day of Petroleum and 1,000,000 Petroleum Product

800,000 EPRINC's U.S. Daily

Barrels Per Day Per Barrels Crude by Rail Estimate 600,000 - 850,000 b/d Oct 2014 400,000 EPRINC's Canada Daily 200,000 Crude by Rail Estimate - 230,000 b/d Oct 2014

Jul 13 Jul Jul 08 Jul 09 Jul 10 Jul 11 Jul 12 Jul 14 Jul

Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan

Oct Oct 08 Oct 09 Oct 10 Oct 11 Oct 12 Oct 13 Oct 14

Apr 08 Apr 09 Apr 10 Apr 11 Apr 12 Apr 13 Apr 14 Apr

Source: AAR; Crude and petroleum product includes liquefied gases, asphalt, fuel oil, lubricating oil, jet fuel, etc. U.S. operations exclude U.S. operations of CN and CP. Canadian operations include CN and CP and their U.S. operations. One carload holds 30,000 gallons (or 714.3 barrels).

34 Refineries and all that light sweet crude….

35 Where the light and heavy need to go….or should go

Total Coking Capacity vs. Atmospheric Crude Distillation Capacity by PADD

10,000,000 Cokers = 60 Operable 9,000,000 Heavy Atmospheric refining 50 Crude Oil 8,000,000 Distillation capability Capacity 7,000,000 40 6,000,000 Thermal 5,000,000 30 Cracking Coking 4,000,000 Downstream

BarrelsCalendarPer Day Charge

20 NumberofRefineries 3,000,000 Capacity

2,000,000 10 Operating 1,000,000 Refineries

- 0 PADD 1 PADD 2 PADD 3 PADD 4 PADD 5 East Coast Midwest Gulf Coast Rockies West Coast Source: AFPM map, EIA data for graph

36 Share of Canadian Imports by PADD - RED PADD I PADD II PADD IV 2500 1500 350 Rocky Mountain East Coast 2000 300 (PADD 4) Total 1000 (PADD 1) 1500 250 Foreign Imports Total Foreign 1000 Midwest (PADD 200 Imports 2) Total Foreign 150 Rocky Mountain 500 500 100 (PADD 4) Imports 0 Imports 50 East Coast 0 from Canada

0 (PADD 1) Midwest (PADD

2013 2009 2010 2011 2012 Imports from 2008 2) Imports from

Canada Canada Jan-Aug2014 PADD III PADD V 1400 6000 1200 5000 1000 4000 800 3000 600 West Coast (PADD 5) Gulf Coast (PADD 3) Total Total Foreign Imports 2000 Foreign Imports 400 West Coast (PADD 5) 200 1000 Gulf Coast (PADD 3) Imports from Canada Imports from Canada ThousandBarrels per Day 0 ThousandBarrels per Day 0

Source: EIA Data

37 Bakken Quality Comparison

A good barrel, but too many “light ends” – propane, butanes, etc. that can’t blend

Source: Continental Resources March Investor Presentation, Permission granted

38 Refinery Acquisition Costs (RAC)

$140 $140 Imported Domestic $120 East Coast (PADD 1) $120 East Coast (PADD 1) Crude Oil Imported Crude Oil Domestic Acquisition Cost by Acquisition Cost by Refiners $/bbl Refiners $/bbl $100 $100 Midwest (PADD 2) Crude Oil Imported Midwest (PADD 2) Acquisition Cost by Crude Oil Domestic $80 Refiners $/bbl $80 Acquisition Cost by Gulf Coast (PADD 3) Refiners $/bbl Crude Oil Imported Regional $60 Acquisition Cost by $60 Gulf Coast (PADD 3) Refiners $/bbl discounts Crude Oil Domestic Rocky Mountain Acquisition Cost by $40 (PADD 4) Crude Oil $40 further Refiners $/bbl Imported Acquisition incentivize Cost by Refiners $/bbl Rocky Mountain $20 West Coast (PADD 5) $20 crude by rail to (PADD 4) Crude Oil Crude Oil Imported coasts Domestic Acquisition Acquisition Cost by Cost by Refiners Refiners $/bbl $/bbl

$0 $0

Jan-11 Jan-14 Jan-12 Jan-13 Jan-14 Jan-11 Jan-12 Jan-13

Sep-11 Sep-12 Sep-13 Sep-11 Sep-12 Sep-13

May-11 May-12 May-13 May-14 May-11 May-12 May-13 May-14

Source: EIA

39 Oil…I mean condensate exports

Source: Drilling Info

40 U.S. Annual Exports

U.S. Exports U.S. Petroleum Products Exports 3000 1200

2500 1000 U.S. Exports of Distillate Fuel Oil U.S. Exports of Mbbl/d Finished Petroleum 2000 Products Mbbl/d 800 U.S. Exports of Finished Motor U.S. Exports of Natural Gasoline Mbbl/d Gas Liquids and Liquid 1500 Refinery Gases Mbbl/d 600 U.S. Exports of Petroleum Coke U.S. Exports of Other Mbbl/d Liquids Mbbl/d 1000 U.S. Exports of

ThousandBarrels per Day 400 Thousand BarrelsThousandDay per Residual Fuel Oil U.S. Exports of Crude Mbbl/d Oil Mbbl/d U.S. Exports of 500 200 Kerosene-Type Jet Fuel Mbbl/d

Distillate 1.3 mbd 0

1992 1983 1986 1989 1995 1998 2001 2004 2007 2010 2013 Gasoline 400,000 b/d Source: EIA

41 Condensate Processing

Source: Turner Mason, EIA 2014 Annual DC Conference

42 Geology of the Eagle Ford = Varying Liquid Grades

Source: Momentum Oil and Gas LLC, DUG Eagle Ford Conference Presentation Oct 2011; EOG Investor Presentation Feb 2014;

43 These differences have been impacting prices

Nov 11th, 2014 WTI $77 Brent $81 Nat Gas $4.25

44 Regional Discounts Matter with High Cost Production

Source: WSJ, April 20, 2014, Russel Gold Theo Francis “The New Winners and Losers America’s Shale Boom” Source: ITG Investment Presentation Nov 2012 45 45 Accidents and Regulations

46 Recent Crude by Rail Accidents • July 6, 2013, a run-away train crashed and exploded in Lac-Mégantic, Quebec, killing 47 people and destroying parts of the town • November 8, 2013, about 12 cars derailed in a unit train of 90 cars carrying crude oil near Aliceville, Alabama (45 miles SW Tuscaloosa). Nobody was injured, but three of the cars exploded. • December 30, 2013, a train hauling grain derailed near Casselton,(SE) ND hitting a 106 car unit train of crude oil which caused 18 crude tank cars to derail causing a massive explosion and fireball • January 7, 2014, a Canadian National train jumped tracks in Plaster Rock, New Brunswick. 15 cars derailed and caught fire. The train was carrying propane and crude oil from Western Canada • January 20, 2014, a CSX train derailed in Pennsylvania on a railroad bridge and close a busy expressway (Schuylkill), but did not leak any crude oil. • April 30, 2014, oil tanks cars on CSX derailed and caught fire in Lynchburg, VA (3 of 15 cars that derailed caught fire). Nobody was injured by 300 people were evacuated temporarily

Source: PHMSA proposed rules; http://www.regulations.gov/#!documentDetail;D=PHMSA-2012-0082-0180

47 Crude by Rail Accidents

LAC MAGENTIC: AP PHOTO/THE CANADIAN PRESS, PAUL CHIASSON

http://usnews.nbcnews.com/_news/2013/12/30/22113442-mile-long-train- carrying-crude-oil-derails-explodes-in-north-dakota?lite

48 Lac Magentic Crude by Rail Accident

SOURCE: NATIONAL POST, JAKE EDMISTON AND ANDREW BARR, MIKE FAILLE, JONATHAN RIVAIT, RICHARD JOHNSON | July 12, 2013 | Last Updated: Aug 7 5:36 PM ET

49 Canadian TSB finds 18 causes and contributing factors

Source: TSB, http://www.tsb.gc.ca/eng/rapports-reports/rail/2013/r13d0054/r13d0054-r-es.asp

50 Emergency Orders and Recommendations beginning May 2014

51 Comprehensive Regulation Proposals by PHMSA

Source: PHMSA proposed rules; http://www.regulations.gov/#!documentDetail;D=PHMSA-2012-0082-0180

52 The Tank Car • Regulations designed to retrofit older DOT 111 tank cars and set standards for new tank cars, but specification and retrofitting requirements have yet to be

Source: DOT 111, Wikipedia implemented/determined. • Some tank car manufacturing companies have moved ahead in anticipation of regs and are building higher strength tank cars above expected regulations.

Source: “Tank Car of the Future,” Greenbrier presentation via RBN Energy

Source: PHMSA proposed rules; http://www.regulations.gov/#!documentDetail;D=PHMSA-2012-0082-0180

53 How many tank cars?

Source: PHMSA proposed rules; http://www.regulations.gov/#!documentDetail;D=PHMSA-2012-0082-0180

54 Many Entities Involved

Issues Groups Involved • labeling • producers • volatility • truckers • rail safety • shippers • tank car strength • marketers • refineries • railroads • tank car manufacturers

55 Not necessarily on the same page

Rail executives, including Mr. Harrison, have criticized the moves, warning that such regulation could prove costly and onerous. "Those bureaucrats have no transportation experience," he said, adding that reducing speed further for all cargo, including crude and other hazardous materials, Instead, attention should shift to the rail industry's safety record, said as has been proposed, would be a "nightmare" for the Charles Drevna, president of the oil-refiner trade group, some of railroad. whose members have made big investments in crude-by-rail WSJ, “CP’s Boss: A Too-Tough Love?,” David George-Cosh, May 13, infrastructure such as tank cars. "The debate should now focus on 2014 the remaining issues—track integrity and maintenance and training for rail operators and responders," Mr. Drevna said.”

“Kari Cutting, vice president of the North Dakota Petroleum Council, said she didn't know what had changed since her group met with PHMSA last week…’Our Bakken characterization study is not indicating that Bakken crude oil is more hazardous than other crude oil, and we're thinking that Bakken crude oil is being singled out for political reasons,’ Cutting said in an interview yesterday. EEnews, “DOT crude by rail orders close in on Bakken oil,” May 8 2014

56 New York Moratorium

• NY’s Albany County placed a moratorium on crude oil processing expansions in the Port of Albany until health investigations and environmental impacts could be assessed

• Global Partners and Buckeye in Albany hub • Global had received permits to double facility in 2012

• In January 2014 Gov Source: New York Times, Jad Mouawad, “Bakken Crude, Rolling Through Albany,” Feb 27, 2014 Cuomo signed order for top bottom safety review of crude by rail and water and writes letter to Obama

57 Class 1 vs. Shortline Railroads

Source: Wikipedia; EPRINC Maps using Hart Energy data and ArcGIS Mapping software

58 Bakken Crude Volatility

Source: WSJ, Russel Gold, “Bakken Shale Carries High Combustion Risk,” Feb 23, 2014

59 Spill volume of rail through 2007

Source: CRS Rail Transportation of Crude Oil, May 2014