On June 3, 2013, Gordon Heisler, Senior Consultant at PLG Consulting presented at the American Railway Development Association’s 107th Annual Meeting in San Francisco, CA. Gordon’s presentation, entitled “The Energy Opportunity in Oil & Natural Gas. Crude Oil is Only the Beginning,” analyzes and forecasts the dramatic impact of shale oil and gas which has upended traditional logistics and trading patterns in the energy industry, starting an industrial renaissance in the US.

1. 1
The Energy
Opportunity in
Oil & Natural Gas.
Crude Oil is Only the
Beginning
Gordon R. Heisler
Senior Consultant, PLG Consulting
Online: PLGConsulting.com
Prepared for
American Railway
Development Association
June 3, 2013 San Francisco, CA
Professional Logistics Group

2. » Boutique consulting firm specializing in logistics, engineering, and
supply chain
 Established in 2001
 Over 100 clients and 250 engagements
» Headquarters in Chicago USA, with team members throughout
the US and with “on the ground” experience in:
 North America / Europe / South America / Asia / Middle East
» Consulting services
 Strategy & optimization
 Assessments & benchmarking
 Transportation infrastructure & engineering
 Logistics operations
 M&A/investments/private equity
» Key industry verticals:
 Energy
 Bulk Commodities
 Manufacturing
 Private equity
About PLG Consulting
2

3. Today’s Discussion
» Domestic Shale Play overview
» Shale drilling inputs and production – Natural Gas,
Natural Gas Liquids (NGLs) and Crude Oil
» Downstream products - growth opportunities
» Bakken Shale impact on Crude Oil by Rail
» Rail Development Opportunities
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4. The Shale Development
Revolution – Big Picture
Disruptive
Technologies
-Hydraulic Fracturing
-Horizontal Drilling
Continuous
Evolution
-Constant Change
-Rapid Change
-Difficult to predict
Marketing
Dynamics
-Supply & Demand
-Customers
-Product Price
-Logistics
4

5. Hydraulic Fracturing and
Horizontal Drilling
Great YouTube Video by Marathon on Fracking
http://www.youtube.com/watch?v=VY34PQUiwOQ
5

6. US Shale Plays
6
Gas:
Marcellus
Haynesville
Barnett
Oil:
Bakken
Eagle Ford
Permian Basin
Most Active Plays
Utica
Niobrara
Mississippi Lime
Emerging Plays

7. Shale Driving Growth in Natural
Gas and Crude Oil Production
» 1,769 onshore rigs in operation (May 10, 2013)
» Since 2010, crude oil production has increased 29%
and natural gas production has increased 16%
» Domestic oil production at 21-year high (7.2 MM bbl/d)
7Source: Baker Hughes 2013
Feb. 2013
7.18MM bpd
U.S. Crude Oil Production
Source: EIA
GAS OIL THERMAL
Source: Baker Hughes
GAS OIL THERMAL
Feb. 2013
1.85 MM cubic ft
U.S. Dry Natural Gas Production
Source: EIA

8. 8
Shale Development Supply Chain
and Downstream Impacts
Feedstock (Ethane)
Byproduct (Condensate)
Home Heating (Propane)
Other Fuels
Other Fuels
Gasoline
Inputs >> Wellhead >> Direct Output >> Thermal >> Fuels >> Raw Materials >> Downstream Products
Gas
NGLs
Crude
Proppants
OCTG
Chemicals
Water
Cement
Generation
Process Feedstocks
All Manufacturing
Steel
Fertilizer (Ammonia)
Methanol
Chemicals
Petroleum Products
Petrochemicals
» Shale development impact on the rail industry is long-term, wide-ranging, and positive with only one exception

9. Hydraulic Fracturing Materials Inputs
and Logistics – Per Well
9
Materials
Chemicals
Clean Water/
Cement
Proppants
OCTG (Pipe)
Source to
Transloading
2
Local source
40
5
Transloading to
Wellhead Site
8
~1,000
160
20
47 Total
Railcars
~1,200 Total
Truckloads
Oil/Gas/NGLs
Truck, Rail,
Pipeline
Waste Water
~500 Total
Truckloads

10. Shale Play Product
Flows Outbound
» Natural Gas
 Majority via pipelines, some trucks
» Natural Gas Liquids (NGLs)
 Requires processing (fractionation)
 3-9 gallons/MCF (thousand cubic feet)
– Ethane ~42%
– Propane ~28%
– Normal Butane ~8%
– Iso-Butane ~9%
– Condensate ~13%
» Crude Oil
 Bakken play as a model
 Surging Permian and Eagle Ford development
10

11. Shale Development -Natural
Gas Impacts
» Shale gas is a game changer for US
Manufacturing
 Fracking results in oversupply; gas prices down 33%
since 2010
 Coal power plant closures, natural gas powered
electricity growth
» Low gas prices fueling industrial renaissance
 Impacts overall manufacturing cost of electricity; “Re-
shoring”
 Specific sectors that use natural gas as a feedstock
– Fertilizer
– Steel
11Source: EIASource: EIA

12. Coal vs Crude & Sand Trends:
Carloads and Revenue
Total Coal Cars Handled
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
-
1
2
3
4
5
6
7
8
9
10
Billions
Carloads
Millions
Carloads Revenue
Total Crude & Sand Cars Handled
12
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
-
100
200
300
400
500
600
700
800
900
Billions
Thousands
Sand Crude Revenue
STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop

13. Shale Gas Driving Steel
Manufacturing Comeback in US
13
» Shale gas boom makes direct-reduced iron steel
economical
 DRI plants viable with growth and reduced price of shale gas
 Not new technology, but preferable with lower cost natural gas
 DRI process uses natural gas in place of coal to produce iron
 Cost of production 20% lower per ton vs. traditional blast furnace
 DRI-derived steel is of higher quality than that created from recycled
scrap, further driving demand
» U.S. jobs and international investment
 Steel production in the U.S has shrunk 16% since 2008
– Compare to 17% growth in steel production internationally
– Domestic steel industry capacity running at 74%
 At least five new DRI steel plants being considered in the U.S. – now
economical for the first time in 30 years due to low cost of natural gas
» Announced new DRI plants
 Nucor Corp. and Encana Corp. JV in Louisiana - $700MM
 Voestalpine $700MM investment in Texas
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2008 2009 2010 2011 2012 2013
ThousandTonnes
U.S. Monthly Steel Production
Source: World Steel Association

14. Shale Gas Development Impact
on Fertilizer Market
» Natural gas - primary feedstock for ammonia &
Nitrogen fertilizer production
» Lower gas prices directly benefit American farmers
 Increased demand for corn, soybeans has driven fertilizer costs
higher
 Excess natural gas supply can be utilized to produce greater volumes
of fertilizer more economically
 Increased domestic production displaces current imports
» Cheap U.S. natural gas means billions in investment
for new domestic fertilizer plants, displacing ~11 MM
m/t of imports
 Orascom/Iowa Fertilizer Company - Wever, IA
 CHS - Spiritwood, ND
 Ohio Valley Resources - Spencer County, IN
 Yara - Belle Plaine, SK Canada
 North Dakota Grain Growers Association - Williston Basin, ND
 CF Industries – expansions at Donaldsonville, LA and Port Neal, IA
 PotashCorp - resumption of ammonia production at Geismar, LA
 Koch Fertilizer – Enid, OK 14

15. Shale Development Impact:
Chemical Industry
» Abundant ethane supplies have sparked chemical
industry renaissance
 Ethane is “cracked” to make ethylene, the most basic building
block in the chemicals supply chain
 Over $95B in new announced petrochemical expansions will come
on-line over the next five years, increasing ethylene capacity by
33% (11 MMmt)
 USA is now the low-cost producer of ethylene-based chemicals
due to abundant supplies of ethane from shale plays (up to 60%
raw materials cost advantage)
 Domestic end-use of materials, i.e. plastics, will expand
significantly
 Up to 40% of new petrochemical output will be for export
15Source: EIA
Sources: CMAI, TopLine Analytics,
and Alembic analysis, 2012

16. LNG Export Opportunity
» Political/policy battle between domestic
industrial users and producers
» Sabine Pass, LA and Freeport, TX now
permitted for exports; more terminals in
application phase
 3.4 Bcf/day export capacity to come online by
2015
 Represents ~5% of projected US dry gas
production
» 20 additional terminal applications
totaling 29 Bcf/day of export capacity
pending before FERC
16Source: Waterborne Energy Inc. Data in $US/MMBtu

17. Shale Development
Crude Oil Impacts
» Dramatic increases in US production due to fracking
 7.2 MM bbl/day (2013 estimate)
 Projected to grow by ~30% over next four years
 Strong play in Bakken; surging Permian and Eagle Ford development
 “Tight” oil sources driving overall North American growth
 Production forecasts frequently revised upward
 North America should be crude oil independent by 2018 (total bbls produced)
17
Source: Morgan Stanley, February 2013Source: Morgan Stanley, February 2013

18. Crude Oil Loading and
Receiving Terminals - 2010
18

19. Crude Oil Loading and
Receiving Terminals - 2013
19

20. Bakken Production vs. Total Takeaway
Capacity: 2013–2015 Projection
Year ND Production
Forecast (Bpd)
Pipeline
Capacity
Rail Terminal
Capacity
Rail Carrier
Capacity
ND Refinery
Consumption
Total
Outbound &
Refinery
Capacity
Excess Logistics
Capacity
2010 360,000 280,000 115,000 600,000 58,000 453,000 93,000
2013 850,000 565,000 990,000 1,300,000 68,000 1,623,000 773,000
2015 1,150,000 1,075,000 1,040,000 1,350,000 90,000 2,205,000 1,055,000
Source: North Dakota Pipeline Authority, PLG AnalysisBpd = Barrels per Day
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21. Crude Oil Pipelines:
Existing and Planned
21
Source: CAPP Report, 2012
» Current pipelines ex. Bakken
operating below capacity
» Fixed routes and long lead times are
challenged by new dynamic NA oil
market
 10 year+ commitments required for new
build pipeline projects
» Several natural gas pipeline
conversions planned
 Trunkline (ETP) – Patoka, IL-St.
James, LA
 Freedom (KM) – Permian Basin-
Southern California
 Energy East (TransCanada) – Hardisty,
AB-St. Johns, NB

22. Crude Oil by
Rail vs. Pipeline
$6.50
$12.00
$10.50
$15.00
$-
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
Pipeline to
Cushing
Rail to
Cushing
Pipeline to
Pt Arthur
Rail to
Pt Arthur
DollarsPerBarrel
Source: PLG analysis
» Rail cost: 50-200% more expensive than
pipeline transport
» 70% of Bakken crude oil leaves ND via Rail
(March 2013),
» Existing Bakken pipelines under utilized
» Near-term offsetting rail advantages:
 Site permitting, construction much faster
 Lower capital cost
 Scalable
 Shorter contracts (2-3 year commitments vs. 10
years for pipeline)
 Faster transit times
 Access to coastal areas not connected via
pipeline
 Origin/destination flexibility
 Primary advantage: Tool of arbitrage for trading
desks
Cost Comparison: Bakken to Cushing and USGC
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23. 23
Shale Development Impact on
Crude Oil Market Dynamics
» Price differentials driving trading and
logistics patterns
 Bakken and WTI trading at ~$10-$15/bbl less than Brent;
Alberta Bitumen trading at ~$30/bbl less than Brent
 E&P, midstream players willing to rapidly deploy significant
capital to enable access
– Multi-modal logistics hubs in shale plays
– New multi-modal terminals/trading hubs at destination markets (i.e.
Cushing, OK, St. James, LA, Pt. Arthur, TX, Albany, NY, Bakersfield,
CA)
 Refineries installing unit train receiving capability -
particularly coastal refineries previously captive to
waterborne imports (i.e. Philadelphia, PA, St. John, NB,
Anacortes, WA, Ferndale, WA)
 Constantly changing trading and logistics patterns for
light/sweet mid continent crudes
23
Key
Drivers
Destination
Markets
Oil
Price
Logistics
Capital

24. 24
Looking Ahead:
North American Crude Oil
» The gusher of new US light/sweet shale oil production made
possible by fracking has upended the traditional oil logistics and
trading patterns
» The biggest current bottleneck: Railcars
 Current order backlog runs to mid 2015
 Extremely tight market with very high lease rates
 Current crude by rail fleet ~30,000 railcars, or 1-1.5 MM bbl/day equivalent
» A “new normal” in crude oil flows will emerge in conjunction with
continued North American oil production over the next five years
 Continued shifts of mid-continent light/sweet to coastal destinations
 New modes and infrastructure to get Canadian bitumen to USGC, with or without
Keystone XL
 Permian, Eagle Ford to meet USGC light/sweet demand; Bakken flows primarily east-
west
 Eventual government approval of crude oil exports on a limited basis, similar to LNG
24
Source: CME and Morningstar

25. Looking Ahead: Crude Oil Anticipated
Production Growth and Product Flows
25
= Light/Sweet
= Heavy/Sour
= Pipeline
= Marine
= Rail
= Storage terminal(s)
= Refinery cluster – Light
Sweet/Intermediate
= Refinery cluster – Heavy
Sour/Intermediate
= Current b/d (000)
= Future b/d (000) additional by 2017+420
123
Bakken
+855
704
Oil Sands
+982
1,615
Eagle Ford
+1,087
352
Permian
+607
514
Source: BENTEK Energy, CAPP, Railroad Commission of Texas, PLG Consulting

26. 26
Rail Site Development
Opportunities
» Fracking materials – transload sites
» Crude oil terminals – loading terminals $ 3-80MM
» Receiving terminals $ 25-75MM
» Downstream facilities
 Steel production plants $700 million each
 Fertilizer production plants $1 billion each
 LNG export terminals $5 billion each
 Chemical production plants $ ???
 Fractionation (gas) plants $200MM+ each
» All facilities require inbound construction
materials, steel, fertilizer and chemical plants have
in/out bound rail carloads

27. Thank You!
For follow up questions and information, please contact:
Taylor Robinson, President
+1-508-982-1319 / trobinson@prologisticsgroup.com
Graham Brisben, CEO
+1-708-386-0700 / gbrisben@prologisticsgroup.com
Gordon Heisler, Senior Consultant
+1-215-620-4247 / gheisler@prologisticsgroup.com
This presentation is available at:
PLGConsulting.com
Professional Logistics Group
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